If there was any uncertainty about the markets’ reaction yesterday to Ireland’s bail-out, and to subsequent events, today’s plummeting Irish bank shares and more evidence of the fear of contagion in the markets should remove all doubt.
The euro has hit a seven-week low against the dollar and global stock markets retreated today on fears that the Republic’s debt crisis may spread to other European countries with large budget deficits.
Investors fear that Portugal and Spain may also have to seek financial help. The Spanish government faced a sharp rise in the cost of its short-term borrowings at an auction today while the yield on longer-term bonds also rose.
Spanish 10-year bonds dropped a sixth day, with the yield 16 basis points higher at 4.91 percent. The yield spread to benchmark German 10-year bonds widened to a euro-era record. Portugal’s 10-year yield rose 21 basis points to 7.02 per cent.
Still everyone’s hero, Robert Peston, has been listening to his new hero again.
By the way, I don’t know whether it adds to or detracts from financial stability that Ireland’s central bank governor, Patrick Honohan, has again been refreshingly frank today, in an address to the Chartered Accountants Ireland Financial Services Seminar (yes, I know it’s not fair that we weren’t all able to get tickets).
Mr Honohan admits that Ireland’s banks have been hopeless at making adeqate provisions for expected losses on their poor loans or in keeping investors abreast of the risks they take.
Little wonder then that the Irish banks’ creditors trust them so little, and have been pulling out their money by the tens of billions of euros, till the banks – and the Irish state that stands behind them – have been taken to the brink of collapse.
Mr Honohan also points out that Ireland’s official GDP and unit labour cost statistics have consisently overstated the size of the Irish economy and its productivity respectively – largely because that economy is so dependent on multinationals with headquarters in the Republic, whose high profits acrrue to the overseas owners of those multinationals rather than to Irish residents.
That overstatement of the magnitude of the output of Irish residents, which in some real sense is attributable to those residents, could be as much as quarter, he says.
Which implies of course that the ability of Ireland to repay its enormous bank and state debts is even worse than the eye-poppingly high ratios of borrowing to GDP would imply.
And the BBC’s Europe editor, Gavin Hewitt, has another concern as “the long term nature of this crisis  is just beginning to gain recognition.”
Ireland was much praised for applying austerity early. Greece has been cutting wages and benefits in the public sector since May.
Spain announced today progress in reducing its budget deficit but unemployment is stubbornly stuck at 20% and growth hovers just about zero.
So how will these countries grow? Where will demand come from?
And how precisely will they become more competitive? Some of the structural changes – like making labour laws more flexible – will certainly help. But the gap between them and Germany continues to widen.
The main difficulty is that, being in a common currency, they have a fixed exchange rate and they cannot resort to devaluation which would make it easier to sell their goods and services abroad.
So there really is little alternative than to hold down wages for years to come. A generation – in these bail-out countries – will see a cut in living standards.
And that prompts another question – will the voters accept this as the price for defending a common currency.
And as Stephanie Flanders said
This is what should be troubling Europe’s leaders about Ireland. Greece is seen as a country that broke the rules and has to pay. Ireland has its faults, which European officials may choose now to play up. But, at bottom, it is a country that played by the rules of the euro and failed. Other countries striving to make a go of the single currency will reasonably ask whether the same fate awaits them.