Home » Monetary policy » Euro Crisis, Part II

Euro Crisis, Part II

by John Rubino on August 12, 2010 · 17 comments

Remember the euro-zone crisis? Front page news for weeks, and then…nothing. Could they have found the secret formula for eliminating an overwhelming debt load without hyperinflation or depression?

Nah. They were just taking a break, and now they’re back. Greece’s economy is contracting and Spain’s regional governments are being shut out of the debt markets. And tonight the Wall Street Journal reports that Irish banks are getting a bailout:

ECB Buys Irish Government Bonds to Calm Market

The European Central Bank has bought short-dated Irish government bonds over the past 24 hours in a bid to calm rising market volatility stemming from concerns on the creditworthiness of Irish banks, two people familiar with the matter said.

The move, part of the ECB’s current program of bond purchases which it launched in May in a bid to stabilize euro-zone government bond markets, came after volatility rose sharply in short-term Irish government bonds amid low trading volumes, the people said.

The ECB declined to comment on the matter, but will announce the amount of bonds it bought this week on Monday.

The benchmark two-year Irish government bond, a 3.9% security maturing in May 2012, saw its bid price drop to a low of 100.795 on Thursday, down from 101.585 at Tuesday’s close, equating to a yield of 3.35%, up from 2.837% on Tuesday, according to TradeWeb data.

The bond’s yield, which represents the cost of borrowing for the Irish government, rose further in early trading Thursday to a high of 3.426% although it has since dropped to 3.216% in mid-morning dealings, the data show.

The market ruction was triggered partly by the Bank of Ireland’s announcement Wednesday that its underlying pretax loss nearly doubled in the first half of 2010 amid high loan impairment charges. On top of that, the European Commission has cleared the Irish government to inject another €10 billion ($12.89 billion) of capital into Anglo Irish Bank beyond the €14.3 billion already provided.

These events suggest the government will continue to have to bail out the country’s banks, pressuring public finances and denting the outlook for Irish government bonds.

Investors are particularly concerned about the ability of some Irish banks to raise new financing when their existing government-guaranteed debt issues mature in September. They are also worried about an auction on Tuesday next week of two bond issues due 2014 and 2020.

The Irish National Treasury Management Agency managed to sell €1 billion of two series of treasury bills, receiving total bids of €3.38 billion, or 3.4 times the amount on offer.

The two people, who are bank dealing sources, said the ECB started soliciting offers for short-dated Irish government bonds on Wednesday in a move designed to restore confidence in the market and a few trades were then executed by the ECB.

“Because the volumes in the market were very low, it was enough for them [the ECB], to a certain extent, to just ask dealers for prices to remind everybody that they would step in,” said one person. “However, there were some flows so the ECB has definitely bought some bonds.”

The annual cost of insuring €10 million of Irish debt rose around €12,000 on Thursday, hitting €282,000, up from around €200,000 at the start of the week. The cost of insuring a similar amount of bonds issued by Anglo Irish Bank and Allied Irish Banks PLC were both around €50,000 higher on the week at €532,000 and €425,000 respectively.

The risk premium that investors are demanding to hold Irish government bonds is “ridiculous,” said Patrick Honohan, Ireland’s central bank governor, in an interview with the Daily Telegraph newspaper, published on Thursday. They aren’t giving Ireland credit for cutting its budget deficit, he said.

The ECB has been reducing its bond purchases gradually in recent weeks. It said Monday that it bought only €9 million in the first week of August, down from €81 million the week before and €176 million the week before that.

  • http://www.billhopen.com billhopen

    But I thought “Ire-land ” was the very portrait of an austerity-solution, a bailed-out, on-the-road-to-stabilized recovery story, the veritable “poster boy”— that we no longer had to even think about. Hmmm, The next thing you know Du Bai will pop up again along with Greece, deja vu Les PIGSS Argentina Pakistan (its becoming a world wide game of default whack-a-mole) ……it just goes to show that too much debt, shrinking GDP is a problem leading to default, no matter what , and default in one place leads to default in another and all the banks are tied together and with all that vaporizing principal and rising risk rate interest rates-there really very little money to spread around—(hmm I think we call that deflation)—, certainly not enough to bail out bigger countries who lent out too much to sub prime soverigns. there’s really been so little delevering and more new bad debt default is pileing on in the next years, erasing large swaths of “assets” that were a mirage of collateral. “I suggest ya Panic” like Huge Hendry said may be the memorable quote of this year in trading

  • http://dollarcollapse.com Chris

    If government involvement in the free market could solve the financial problems of the world, then the communist would have succeeded. The world financial problems are due to government meddling with the economies since the late eighties that created this huge monstrous debt in the western world. Every recession, since the 1987 crash, required exponential amount of money to be thrown at the problem starting with billions and now it is trillions dollars. The next recession will probably requires hundreds of trillions of dollars to bail out failed financial institutions. This looks like a ponzi scheme and it looks like the next recession will definitely be unsavable. I can only think of the derivatives would be the most likely candidate for possible failure. Are regulators, Obama, congress or even the world government not worried. Is there no one out there who would like to know how this derivatives work and audit it to make sure it is sound. This market is worth quadrillion of dollars.

  • Hugo

    The only smart thing a government can do is check the central bank. Does it hold more than the government owes? Force the fuckers to liquidate all and repay all government debt. Problem solved. If they have less, call goldman use derivatives to turn the taxincome of 2020 into cash. Leverage that 100 times. Pay down the debt and have some fun. You might make it if you crush a big one like the Crimex or LBMA. If you do stupid stuff like Ireland or Greece your dead. A well they were doomed from the moment they joined Euro(pe).

  • Andrew Clifford

    Why is it still a given that perptually bankrupt banks deserve perpetual taxpayer bailouts?

    It is two years since the Irish banks went insolvent – and the extend and pretend continues, beggaring the whole Irish economy for decades (Japan is the poster-child of this disastrous policy. They are still in the mire 20 years later!).

    The correct action is to dismantle each bank – starting with the worst. Move the branches and savings to new – or better still – deserving banks/building socieities which never went gaga during the boom years.
    Then the shareholders get wiped out and bondholders get a 70% – 90% haircut (whatever few euros the bad assets will obtain in the open market).

    Job done. Ireland will bounce back.

  • Brutlstrudl

    billhopen, “not enough money o spread around”, is exactly it. However. there is enough gold… at the right price

  • http://www.billhopen.com billhopen

    Brutstrul…what ever money is, is what “capitol” is expressed in(and that is always a roiling and ever changing interchangable mixture of tangibles like gold and instruments like notes) The capitol that we (US, Europe, Japan, etc) foresaw as tommorrow’s income/capitol was spent on yesterday’s consumption. period. So the economy contracts, and default destroy the illusory increase in wealth that creditexpansion led us all to belive we possessed.

    The vision of perpetual growth, has slamed into the exponetial hockey stick graph wall, The world and its resources are finite, it can’t be limitless growth straight up into the sky that can’t continue even in our fantsasy of money printing…the ponsi unwinds.

    As far as gold goes, there’s about 1 oz per person on earth, we can increase it by mining at about .05% per year, Gold is a tangible reality based limited expansion measure of value, unlike banknotes.

  • http://dollarcollapse.com Chris

    All these talks about debts actually boil down to trade and budget deficits. Trade deficits can be addressed by currencies exchange rates and budget deficits will follow through if trade deficits can be reversed to surplus. On a macro basis, the surplus countries become richer and have more tax money to spend as there are more jobs and companies. The companies in the western world that thrive on this present environment are in the extreme end of the normal distribution curve and they are the ones controlling all the powers of influence (all kinds of media) and decision making process. If the way exchange rates are allowed to be managed, the free market will prevail and bond market will collapse. If the US government have to choose between anarchy or bond market, it will rather bond goes to zero and replace it with a new currency and start all over again. This is a worst case scenario. If currency exchange rates can be adjusted to have trade balance, at least the world economic system will continue to roll on. If not then allow for a mild depression so that prices can come down and debt be reset for the system to be cleansed. The problem with the US economy is that there is no meaningful recession to cleanse the system since 1987. We are at a point of cleanse or bust. The US economy had been saved by first privatising most government owned companies like electricity, telecoms, etc. Then they had the tech boom and recently the real estate boom. Now it is the currency boom which is the last for sure. Now maybe we can understabd why US$ is strong when it is supposed to be weak. It is the sign of the last leg. I hope it will not happen. Balanced trade is the way to go. Balanced trade means currenci

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  • http://dollarcollapse.com Chris

    Balanced trade means currencies will adjust to compensate for trade surplus or deficit. Then we have a good system. This is not happening for a long long time.

  • http://www.billhopen.com billhopen


    Assuming we could adjust our currencies so that Chinese sneakers fair wage cost was $200 and DVD players $500 instead of $39. would the avg American Joe be better off? American apples and wheat and coal would export to China where the now very well paid people would have lots of money to buy goods out from under what Americans could pay, leaving us hungry, in the dark as well as barefoot without electronics…but at least we’d have a job picking apples for the export market.

    Global wage parity means we would all become peasants, that would be tough for developed economy populations to endur. We Americans cannot all be in phd biotech research or elite inovation engineering, the vast majority just need labor work at a little job making something, growing something, mining something to create the wealth engine for our society. Now of course service and consumer economies are a big part of the economic activity…but the wealth has to come from somewhere

  • Brad Thrasher


    Can we get past the Keynes v. Austrian School debate? We are no longer dealing with well intentioned academicians.

    We in the USA, are dealing with oligarchs who have corrupted our republic and established a criminal state or rogue nation.

    As for the Europeans, I don’t know what to make of them anymore. Are they subsidiaries, junior partners or colonies? Whatever the distinction, European hubris, especially in the form of obtuse, dogmatic condescension, is amusing indeed.

    The good news kids, is that it doesn’t look to get as bad here in the USA as it will in Europe or China.

    All the best,

  • Brad Thrasher

    It’s a long read. More than one sitting for most. As it turns out even Marx got it right. Which serves to prove the maxim, “even a blind squirrel finds a nut now and then.”


  • niggah please

    the “powers-that-be” dont want ANY of these solutions; not before it’s time. They DO want chaos and world war, and there are plans for revolution beyond the ken of simple folks.

    There is no “bondholders get a 70-90% haircut”… unless you mean holders of any fiat currency. They ARE the bondholders. The accounts are guaranteed, so the result is hyperinflation. Not a loss of numbers, a loss of purchase.

    Marx did get it very right- he is the foremost economist I’ve ever read, standing as he does on the shoulders of those who went before.

    and “Brad Thrasher” above is right on too. Especially about those Europeans…ridiculous children.

    a stalwart black man.

  • Paul

    Don’t get sucked in, it’s just media white wash (Again)….It’s quite obvious that the Eurozone’s problems didn’t vanish over night as soon as Merkel, Cameron et al decided that belt tightening was a prefered financial path than belt loosening. Only a complete fool would think otherwise.

    Of course there will be a few more casualties in Europe, but at least they’re appearing to try and tackle the problem head on……

    ……Different in the good ‘ole USA of course, where headlines such as those above are the staple diet of financial talking heads everywhere.

    I can here them on CNBC & Fox right now –

    “Eurozone in Financial meldown – again”

    “While back here in the castle, the excellent record of the US Fed continues to push forward the US recovery…..no double dip here”

    YEAH RIGHT…..Laugh out loud, Laugh out very very loudly……

  • Chris


    When I mentioned that currencies of some countries should move up when they are experiencing trade surplus, I meant a free market kind of moving up, on a macro basis. Trade involves not just goods but services. So it will not result in drastic increase in prices of electronic goods. But it will result in increase in prices to the extend where some products and services could be competitively produced in the deficit countries. If a country has surplus continuously, it must be manipulating its currency. This practice had caused an imbalanced world economy which will come to a sorry end. This also caused the rise of the financial giants in the west.

  • PeteCA

    Chris … quite right with your first comments. Apparently the whole concept of a “free economy” was just a ruse while the western economies were doing well. But at the first sign of serious economic strains … then massive governmental intrusion (and central bank manipulation) becomes the order of the day. And for what? Just to bail out a bunch of egotistical bankers, insufferable bond holders, and spineless politicians.

    As far as the quadrillion dollar derivative market goes … if you study it in detail then it becomes even more worrisome. It’s inconceivable that they could have allowed such a titanic house-of-cards to develop in this way. It smacks of greed and reckless incompetence – at the highest levels of political & financial power. If the derviatives had been limited in scope, sensibly managed, and with low levels of leverage – then I do think the central banks could have finagled a solution. As it is now – this house of cards is destined to crumble. End result – a major world financial crisis. Nothing but complete idiocy.


  • Chris


    I believe the derivatives will be the ultimate end and it had to be looked into to try and fix it. As every recession required more money to be thrown at the problem and this money required increased exponentially everytime. The next recession will require hundreds of trillions of dollars to prevent the world economy from collapsing. The only market that looks like a hundred trillion dollar problem is the derivative market.

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