- The Washington Times - Tuesday, November 16, 2010

Worries about the European debt crisis boiled over in world markets Tuesday, this time triggered by the prospect of debt-strapped Ireland becoming the second country to need a bailout.

Renewed turmoil in Europe sent investors fleeing into safe-haven U.S. dollars and Treasury bonds, spurring the dollar to a six-week high against the euro. Stock indexes in Britain, France and Germany plunged by 2 percent to 2.6 percent in tumultuous trading.

The Dow Jones industrial average dived more than 200 points to less than 11,000 before recovering some to end the day down 178 points at 11,023. The Dow and the Standard & Poor’s 500 index each lost 1.6 percent after a string of more minor losses last week prompted in part by the renewed crisis in Europe.

In a drama reminiscent of the one that unfolded during the Greek financial crisis last spring, Irish leaders have been meeting with the European Union and International Monetary Fund about getting assistance to deal with burgeoning real estate losses at Ireland’s three nationalized banks.

Prime Minister Brian Cowen, whose popularity plummeted as he pushed through draconian budget cuts to try to avert a debt crisis in the past year, is insisting that the so-called “Celtic Tiger” doesn’t need assistance and has enough cash on hand to fund the government through July.

But investors are worried that the terms of any bailout will require them to take losses on their investments in Irish bonds, under a proposal pushed by Germany. That, in turn, has driven the interest rates that Ireland must pay to more than 8 percent.

Ireland is in a dilemma,” said Sonia Pangusion, senior economist at IHS Global Insight. While Dublin doesn’t think it needs to submit to the humiliation of a bailout, its precarious bank finances are overshadowing other vulnerable European debt markets in Spain and Portugal and causing interest rates to rise across the southern rim of Europe.

This has prompted the EU and IMF to urge Ireland to take the money “for the good of the eurozone” to try to contain the spreading crisis and keep it from endangering Europe’s fragile economic recovery, Ms. Pangusion said.

After meeting with Ireland’s finance minister in Brussels, EU monetary affairs chief Olli Rehn late Tuesday said that “Irish authorities are committed to working” with the EU to calm the markets and that they “intensified preparations for a potential program in case it is requested and deemed necessary.”

But taking such a step would be painful for Ireland and Mr. Cowen, in particular, whose Fianna Fail party prides itself on its role in the fight for Irish independence from Britain.

Mr. Cowen faces considerable political pressure whatever he does. On Tuesday, he got a grilling from Ireland’s parliament for failing to come up with a promised four-year plan for dealing with the national debts.

“This is a democracy, and people died on the street for it. It will not be closed down by incompetence,” said Enda Kenny, leader of the main Fine Gael opposition party, as reported by Reuters. “It will not become the laughingstock of Europe.”

Ms. Pangusion said Ireland was thrust into this quandary because of adverse market reaction to the German proposal, which would require nations that get bailouts in the future to restructure their debts under a permanent program for dealing with insolvent states that by 2013 would replace the EU’s $1 trillion temporary bailout program.

Germany wants to change the rules of the game in order to shift the balance of credit risk back onto debt investors from taxpayers,” she said, but the timing of the proposal was “inappropriate” because of the fragile state of the European economy and markets.

The EU last week sought to calm markets by insisting that any new debt-restructuring rules in place in 2013 will not affect debt securities being issued today or bailouts that occur under the temporary assistance program.

But at this point, “eurozone bond investors are assuming the worst,” said Ms. Pangusion, despite those assurances.

Whatever Ireland’s misgivings about seeking assistance from the EU, world markets seem to be expecting a bailout of Ireland and its banks, said Sara Yates, an analyst with Barclays Capital.

While the announcement of a bailout package for Ireland could spur a temporary relief rally in the euro, she added, “we expect further euro weakness as the market refocuses on other peripheral economies,” such as those of Spain and Portugal.

David Malpass, president of Encima Capital and a Reagan administration Treasury official, said he doesn’t expect this latest outbreak of the European debt crises to be as wrenching for world markets as the one spawned by the Greek debt crisis last spring.

“The Greece crisis caused speculation about the breakup of the euro. We don’t think there was much risk of that and don’t think this concern will be a factor in Ireland’s crisis,” he said.

Also, European governments demonstrated during the Greek crisis that they have “powerful authority to rearrange and buy debt, and to draw in IMF resources,” giving markets less reason to panic about the crisis spinning out of control, he said.

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