Ireland Is In Trouble

While much of Europe is getting hammered by credit default swaps, Ireland appears to be in some of the most serious trouble. As summarized by Markit's Miles Johnson:

The cost of insuring debt issued by the Irish government leapt higher this morning as Europe’s beleaguered credit derivatives traders swallowed hard on last night’s news the Irish state had finally decided to bail out Anglo Irish bank.

Risk premiums for protecting the debt of Spain, Germany, Austria and Ireland against default also all jumped to record highs according to credit default swap data provider CMA. Credit default swaps written on Ireland widened 37bp to 257.2 . . . .

Among the companies judged less risky than the Irish state are Tesco - currently trading at 122bp or €122,000 - and Nestle, which is quoted at a 72.50bp.

The Economist Intelligence Unit writes:

Solvency fears—from banks to sovereigns

Compounding its recent difficulties surrounding Anglo Irish Bank, the two-party coalition government is also grappling with a self-inflicted crisis in the public finances, and the evidence to date does not suggest that it is rising to the challenge either politically or from a policymaking perspective. . . . A fiscal surplus of 3% of GDP in 2006 is estimated to have turned around rapidly into a deficit of 6.6% of GDP in 2008, which on a comparative basis is by far the most rapid two-year decline of any euro area country since the single currency was launched.***

The Economist Intelligence Unit expects the 2009 deficit to rise to at least 10.7% of GDP, followed by 10.5% in 2010. ***

Yield spreads on Irish 10-year government bonds over benchmark German bunds are now rising sharply. At close of business on January 15th the spread had increased to 189 basis points, up from just 20 basis points at the beginning of 2008 (and up by almost 50 basis points over the past month). In the euro area, the current yield spread is second only to that of Greece, which had its sovereign credit ratings downgraded by Standard & Poor's (S&P) on January 14th. The rising risk premium on Irish government debt is already adding to the pressure on future debt-servicing costs. Given massive new bond issuance by most industrialised countries in 2009, the risk that the Irish government could face serious funding difficulties over the next few years would appear to be rising by the day.

Best of luck to The Emerald Island - I hope it can pull out of its nosedive.