Europe: Unresolved

The US dollar is little changed against the major currencies. The foreign currencies are bouncing along the trough. The market is vulnerable to headline news from Europe, but a EU/IMF bailout package does not appear imminent for Ireland and the government appears to be pinning its hopes on bringing the 2011 budget and 4-year plan forward to next week from early December.

The Irish situation remains unresolved. Yesterday's euro zone finance ministers meeting has been broadened today to include EU finance ministers. This is important because the UK clearly has a vested interested in Irish developments in a way that it didn't for Greece. Two partly owned UK banks have among the largest exposures to Irish firms and households. The Bank of Ireland runs Britain's Post Office savings arms. UK exposure is estimated at about GBP145 bln.

And this is to say nothing about the extensive trade ties. The key difference between the Irish situation and the Greek situation is the crux of the former's problem lies in the private sector. The government, as widely acknowledged, has sufficient cash on hand to avoid having to go to the capital markets for several months. The banks however remain at risk. Their ability to raise capital has been limited largely to short-term funding and with options to put the note back to the bank at face value. As these are put back to the bank, it compounds their funding needs. Irish banks are also extremely dependent on the central bank financing. They account for around 25% of the ECB's liquidity.

Additionally, the exceptional liquidity provided by the Irish central bank has risen substantially over the past week. The problem as we have noted is the Irish banking system is too big for the government to rescue. Rescue as opposed to receivership is the ideologically preferred course. One of the most important issues for traders and investors is whether some sort of package for Ireland would arrest the crisis. We are less sanguine and are concerned that pressure will mount on Portugal and increasingly Spain.