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Like a reluctant bride

Andrew Neil | 11:07 UK time, Wednesday, 17 November 2010

Usually, when you're bankrupt, you go cap in hand to whoever can bail you out.

But Ireland, effectively bankrupt, has reversed that process: like a reluctant bride, it is waving away those (the EU, IMF and even Britain) that want to rescue it from its penury.

There are old Irish demons at work here: Ireland fought long and hard for its independence and any bailout would come with stringent strings that would infringe its sovereignty for the foreseeable future. I suspect that's a price it will shortly have to pay nevertheless.

At the heart of the Irish crisis is its banking crisis. In terms of public borrowing, Ireland is pretty well funded until next summer, assuming it can make the planned drastic cuts in public spending.

These eye-watering 8% yields the bond markets are demanding to buy Irish debt are actually only in the secondary market.

Dublin is not actually paying these yields at the moment since it got away the debt it needs for now before the current crisis developed. But they do reflect the fact that markets now give Irish debt a junk bond status.

But that is not the cause of the current crisis.

That goes back to the autumn of 2008 when the Irish government, in a desperate attempt to shore up confidence in its collapsing banking system, guaranteed all the debts of all Irish banks -- which amounted to many times the country's whole annual GDP -- not just ordinary folk whose deposits were with Irish banks but huge investors, including other banks in the UK and Europe, which held billions in Irish banks' bonds.

The markets now seriously doubt Ireland has the means to pay off its sovereign debt AND the debts of its banks as they fall due.

That is why London, Brussels and Washington (the IMF) is privately urging Dublin to go for a bailout, which I understand could be as much as 100 billion euros.

It would be seen as a bailout of the Irish. In reality it would be another bailout of the European banking system. Major European banks -- including our own RBS and Lloyds -- hold billions in Irish bank bonds.

If the Irish banks, even backed by the Irish government can't pay these debts, then we will be heading for another European banking crisis. In bailing out the Irish the rest of Europe hopes to save its own skin too.

Q&A: Republic of Ireland finances


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