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These are worrying times

Andrew Neil | 10:58 UK time, Tuesday, 23 November 2010

Protests in Dublin

Stock markets are tumbling across Europe this morning. With North and South Korea exchanging fire and Europe's sovereign debt crisis gathering pace, investors are naturally seeking safe havens for their (and our) money.

So the dollar and Swiss Franc are strengthening as I write, as are German bunds (the equivalent of our Treasury gilts) and gold. These are worrying times and the markets are rightly nervous.

Nobody I know who follows these matters closely believes the Irish bail out will solve the European debt crisis. If anything it has merely underlined how precarious things are. The European Union has a E750 billion stabilisation fund at its disposal to help members drowning in debt. When it was created in May (after the Greek bail out) we were told its very existence would calm markets and mean it might never be used.

That theory was brutally mugged by events coming out of Dublin when it applied for help to the stabilisation fund. Now the fear is that if the sovereign debt contagion hits Spain or even Italy the fund just won't be big enough. Meanwhile Greek bonds are trading at record yields (despite its bail out), borrowing costs for Madrid are still high and the cost of insuring Portuguese debt continues to rise. The Irish bail out doesn't mark the end of the sovereign debt crisis -- just the end of the beginning.

Chancellor George Osborne, who has his cheque book out for Dublin, will soon be under pressure to write more cheques for other countries. Not being in the Eurozone doesn't seem to be isolating us from this crisis; but at least British sovereign debt and sterling are not in the firing line.

The coalition will claim that's because the markets are content with its fiscal consolidation plan. It might be right: it is now clear to me that, whoever won our general election in May, in the light of current events our budget deficit would have had to be savaged by far more than any of the politicians told us in the campaign.

Just consider the market pressure we'd currently be under if an incoming government had blithely proceeded to preside over the size of deficit being projected during the election.

Events in Dublin show that sovereign debt has severe consequences for incumbent politicians. Early next year, if not sooner, there will be an election in Ireland and the ruling Fianna Fail coalition will be swept from power to be replaced, everybody in Dublin tells me, by a Fine Gael/Labour coalition, with Fine Gael's Enda Kenny the new Prime Minister.

Don't expect that prospect to calm the markets -- though by then they'll be concentrating more on Lisbon, Madrid and Rome than Dublin.


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