Now it's Ireland's turn to rattle the euro

10/01/2010 1:56 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The Irish crisis keeps getting deeper—at least as judged by spreads on Irish government bonds.

Yields on Irish government bonds hit records on Tuesday, September 28. The yield on the 10-year government bond climbed by 0.25 percentage points on the day to 6.72%. Germany’s benchmark 10-year bond yielded 2.24% that day.

One thing scaring financial markets is that at 6.72% the yield on Irish bonds is about where the yield on Greek bonds was in April 2010 just about a month before the European Central Bank and the IMF (International Monetary Fund) had to step in with a rescue package to stabilize the financial markets. Greek bonds on September 29 were paying a yield of 11.02%.

The immediate cause of the jump in Irish yields was an announcement that on Thursday the government will unveil a plan to pump more money, a projected $6.7 billion, into Anglo Irish Bank. That would take the government’s total injection of capital into Anglo Irish up to $40 billion. And according to Standard & Poor’s that won’t be the end of the capital the government will need to pour into the bank. S&P estimates that the bank will need a total of $47 billion in government money.

Financial markets are worried that, first, the government’s plans will leave taxpayers saddled with billions in losses. The government wants to inject capital into Anglo Irish and other banks and then to split them into a government guaranteed savings and deposit institution and an asset-recovery bank that would manage whatever riskier assets are left after the worst loans have been transferred to the National Asset Management Agency.

And second, financial markets are worried that this plan will ultimately undermine the government’s own program for reducing Ireland’s national budget deficit. That program is built around a combination of growth and, mostly, cuts in government spending. The financial markets fear, rightly I think, that selling an austerity budget (with more cuts in the offing) to voters who see billions going to prop up the banks that led the country into this crisis could become, what shall I say, problematic.

You don’t have to look far for a concrete example of what protest of budget cuts would look like: On September 29 workers in Spain staged that country’s first general strike in eight years to protest government budget cuts.

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