Eurocrisis: can 80bn euro bailout restore calm?
I'm in Brussels at the Ecofin meeting. Here's a few thoughts about what's being briefed to the press and what I think it means.
There are clearly talks going on to stage a bailout of Ireland, rumoured to be around 80bn euros. Ireland wants this to be a complex mixture of sovereign debt bailout and banking bailout.
But I've just spoken to the Dutch FinMin, Jan Kees de Jager who was insisting that, if Ireland asked for an European Union (EU)/International Monetary Fund (IMF) bailout, Dutch voters would only support it if there were strict rules attached. He listed them and I interrupted: "It's that or nothing?" "That or nothing," he replied.
And that's the problem. Ireland doesn't want an EU bailout because it knows it's going to get the scale and timing of its national budget taken over by the EU. Despite that I expect maybe in the next two hours the basics of a deal to be hammered out.
But here's the problem: here, amid the bureaucratic steel and glass of the EU quarter, is the bit they can control. The horsetrading between countries.
Out there, there is the uncontrollable bit - and that's the bond market. It was the bond market that staged a run on south European debt in May; and which has staged one on Ireland's debt this week. The reason is always the same - the fear that they are about to lose some of their money.
Europe's leaders have bent over backwards to avoid investors losing money; they have inflicted pain on taxpayers and service users, and humiliation on national governments in order to stave off the idea of investors losing money.
But everybody knows this is going to happen. That's why a resolution of the Irish crisis needs to happen. As one bondmarket participant told me:
"No-one in the markets thinks that a new treaty is a goer, with the ink not yet dry on Lisbon and a growing number of malcontents in the eurozone making the possibility of such a thing passing in the next few years appear dim."
Absent a new Treaty, the bond markets know the eurozone authorities are going to get pushed from pillar to post as they try to defend one bad debt casualty after another.
Incidentally I don't think this is "speculation": though there are speculators in the sovereign debt market, the market's violent reactions seem to be driven by non-speculative investors suddenly realising how poor their understanding of sovereign risk is. They realise they are actually going to lose money: but they are frantically trying to project incremental judgments and valuations into a space that has become (a) black and white and (b) where there is no real market, only political decisions.
Ireland matters because, (i) once it is sorted, attention turns to Portugal - the last of the small, saveable countries. After that, Spain - and there are even murmurings about France. Never mind if these are rational: once the murmurings start in the bondmarket it's a case of "all that is real is rational" - you just have to deal with it.
(ii) The stress tests for the European banks were organised to exclude the possibility of sovereign debt default - or a controlled default known as restructuring. But as one bond source told me: that went out of the window when Chancellor Angela Merkel started talking about imposing restructuring - ie losses on investors - through a new version of the Lisbon treaty.
A third issue is the perceived failure of the Irish anti-crisis strategy: swift bank bailouts in 2008; swift austerity in 2009. This was the model others were urged to emulate, especially because Ireland had not cooked the books like Greece. With the rest of the world (except America and China) now looking at some form of turn to austerity, they will look at the plight of the Fianna Fail government and mutter: this is how they were treated, what happens to us?
Whatever happens tonight the fundamental crisis of the eurozone is not solved. Only today Austria is reported to have suspended its bailout payment to Greece because it alleged Greece had not met the stringent conditions - which takes me back to the Dutch FinMin and my previous blogs: it's about north Europe imposing fiscal controls on Ireland and southern Europe.
And it's not over.