With the weakening investor appetite for Irish bonds, the sovereign debt crisis of the Eurozone countries has again surfaced. Irish bond spreads soared to record highs, infecting Portugal and Spain. The Ireland 10-year bond spread over the German Bund has hit 685 basis points for the first time since it joined Eurozone.
Irish finance minister Brian Lenihan has blamed recent comments by Germans Chancellor Angela Merkel for the rise in borrowing costs. Germany has been trying hard to shift the burden of future bailouts to other financial players ever since the safety net package of 750 billion euros was announced in June 2010 to help European indebted countries come out from their debt crises.
In the last week of October, Angela got the nod from the EU for a rewrite of EU treaties to create a permanent debt mechanism by 2013 which would prevent a repeat of the Greece-led shock that threatened the euro and even the integration of the EU itself. Germany wants to prevent the crisis by making bondholders share the burden of future bailouts. Reports indicate that Merkel’s crisis resolution plan foresees an extension of debt maturities, suspension of interest payments and a waiver on creditors’ claims. These plans obviously made bond holders nervous, pushing them to begin speculating more on the debt of the most indebted countries, such as Ireland, Portugal and Spain.
Apart from that, Merkel proposed suspension of voting rights for countries which repeatedly miss their budget deficit targets. The proposal was promptly rejected by many countries of the EU. In reaction, Merkel suggested extending the existing provisions to punish the governments which violate human rights and democracy obligations to include punishing for fiscal indiscipline.
That is what Ireland’s finance minister was referring to while blaming the German Chancellor. Mr Lenihan said the proposal has spooked the markets, which he also admits were not fully convinced by the banking bailout. He also said that the key now is getting next month’s budget passed to ensure an outside bailout is not required. The most important suggestion made by Angela was the proposal allowing Eurozone countries to default when things get worse. These attempts by Germany for burden sharing once again sparked fears among investors, thereby increasing Ireland’s and Portugal’s bond yields..
It remains to be seen how the top developed and emerging market economies will tackle this problem in the background of IMF director Strauss Kahn’s comments that the G20 countries are not cooperating each other as they did when they were in the midst of worse financial crises in 2008 and 2009. They are also caught by the possible immanent currency war, as they are the developed economies worried about growing trade and current account deficits.