Ireland Bailout: Relief For Now, But Risks Persist
On November 21, the Irish government formally requested financial support from the European Union, taking the first step in accessing the European Financial Stability Facility (EFSF). The move was largely expected, with visits to Dublin from EU, ECB and IMF officials earlier in the month signaling to markets to price in a bail-out (see Business Monitor Online, November 18, ‘Ireland Bail-Out: What It Means For Eurozone Markets’).
As such, the short-term market implications are likely to be muted, with the euro having already surged above US$1.3700/EUR ahead of the final decision by the Irish government to approach the EFSF. Similarly on the treasury markets, Irish 10-year yields had already compressed by more than 100bps to 7.92% before the November 20-21 weekend. There is potential for further yield compression going forward, although BMI stresses that the EFSF does not wholly mitigate macroeconomic, banking sector, or political risks. Thus, market volatility should remain in future. In Business Monitor Online today, my colleagues and I discuss three key factors:
Short Term: Watch the negotiations between Dublin and Brussels/Berlin
Medium Term: Portugal and Spain bail-out risks will be magnified
Long Term: Macroeconomic challenges will remain throughout eurozone, despite the EFSF