Irish Update

More On Ireland Here

Irish Prime Minister Cowen is trying to reassure the markets. With European central banks reportedly buying Irish bonds (and having appeared to step up their bond purchases a little in recent weeks), the credit default swap market may offer a cleaner read and there the markets are implying the greater risk so far.

But Cowen says not to worry. Ireland is not close to the tipping point and has secured funding through the middle of next year. He is denying speculation that a more costly bailout for Anglo-Irish will drive the government to tap the EFSF. The head of the EFSF would seem to concur, saying that he does not expect any member to tap the EFSF in the coming years. The markets are not as sanguine. While the debate in some countries is about banks being too big to fail, the point we continue to make is that large parts of Europe were more leveraged than the US. The Irish government has already spent almost 20% of GDP to support the banks and more is likely to be forthcoming.

Moreover, as noted earlier, the Irish government seems to be in the process of negotiating a haircut for bond holders of Anglo Irish Bank. While parliament will most likely extend the guarantee on all deposits and most bank securities tomorrow (first implemented Sept 08), investors have to be prepared for the eventual expiration of such facilities and some instruments may also lose the guarantees earlier.

It seems to be an awkward time for ECB's Stark and Makuch to unnecessarily indicate today that the ECB's unconventional measures will indeed expire at the end of the year and not be renewed. The price action over the past three days reinforces perceptions that the $1.3500 area offers the near-term cap. Initial support now is seen in the $1.3440-50 area.