Monday, February 23, 2009

So goes the "Irish Miracle"

Ireland in the face of default?

As the Irish economy along with the rest of Europe continues to deteriorate with the banking sector in a clutter the cost of insuring sovereign Irish debt against default enormously increased. Last week spreads Ireland's five-year credit default swaps rose to a record 377 basis points. Thus, it would cost $377,000 a year to insure a notional $10 million of debt against default. Last year this figure stood just for $24,000.

The economy downturn deeply impacted financial system of the country with the three largest Irish banks nationalized in the course of the government’s bailouts. Still the state will have to pump even more funds to support the economy. Some Irishmen express their concern that the country can get to the same hole as the Iceland which was left virtually bankrupt after its outsized financial sector collapsed under the weight of massive foreign-denominated debt.

Still analysts think that Ireland is not the similar case as Iceland inasmuch as the country ‘has recourse to the European Central Bank and a lot of funds’ while Iceland didn’t. Those who made premature comparisons with Iceland are basing their conclusions on the so-called no-bailout clause of the Maastricht Treaty which allegedly prohibits fellow euro members from coming to the rescue of a member state in risk of default. But analysts say that the threat of a default would likely force fellow members to come to Ireland's aid as they want to keep euro currency intact.

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