“It is the long term nature of this crisis that is just beginning to gain recognition.”

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.

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  • Mack

    That GNP is a better measure of Irish productivity than GDP isn’t exactly news. Unfortunately special interest groups tend to chose which ever one suits their purposes. (E.g. tax or spending or wages are lower as a proportion of GDP than GNP, or debt is sustainable at a given GDP level)

  • joeCanuck

    Pete,

    You have probably just disappointed some of your most ardent fans critics. No mention of himself.

  • percy

    Irish bust better than bailout
    It’s not too late. The request for aid may have been made. The negotiations may have started. But Irish Prime Minister Brian Cowen can still refuse a bailout from the European Union and the International Monetary Fund.

    It might sound like madness for a drowning man to refuse a lifebelt. But the decision the Irish make in the next few days will shape the future of their nation for a generation.

    Ireland would be better off going bust than taking a loan. The conditions attached to a rescue aren’t worth it: Once it takes EU money, it will never get off the hook. And the Irish banks aren’t worth saving anyway. Defaulting on your debts is a far less scary prospect than usually portrayed.

    The real question is whether Ireland’s politicians have the courage to take that step.

  • joeCanuck

    Percy,

    What institution gave you your economics degree and do you think most of your economic colleagues would agree with your prescription?

  • Mack
  • aquifer

    ‘ it is a country that played by the rules of the euro and failed’

    No it is a country whose financial regulators and rulers were drunk at the wheel of an imported sports car running on someone else’s four star.

  • joeCanuck

    Top marks for Mister Mack (with a nod to Mr.Joyce)

    Impressive outing, Mack; well spotted.

  • A.N.Other

    oomberg news agency is reporting alarming comments from Mohamed A El-Erian of Pacific Investment Management Co (Pimco). According to the financial news agency, El-Erian said:

    What you advise your sister in Ireland now is that you’d say take your money out of an Irish bank and put it in another bank headquartered elsewhere. That’s what happened in Argentina and in emerging economies. People worry about their savings.

  • percy

    why joe the most prestigous of the ivy league : Bob Jones

  • slug

    We export more to Southern Ireland than China and India put together. When they go into a hole, they pull us down. That is why we have to lend them some money at times like this.

  • Alias

    It isn’t about lending money to Ireland. Little to nothing of the loan will be used to the benefit of Ireland or its people.

    It’s about lending the money needed to eurosystem lenders so that they can give it to other eurosystem lenders.

    Given that the UK is owed over 100 billion by eurosystem lenders based in Ireland, it should kiss Cowen’s arse for bailing their lenders out at the direct expense of the Irish people rather than pretending it is doing that nation a kindness of some sort.

    As the article cited by Percy and Mack says:

    “Third, this is mostly about rescuing EU financial institutions. It is the Irish banks that are in trouble, and if they go down, it will cause massive losses at other European lenders. But why should the Irish people worry about that? If French, German or British banks suffer big write-downs, let their governments deal with them. Ireland could just close its banks — such a small country doesn’t need its own finance industry any more than it needs its own carmakers.”

  • percy

    I find the slavery to the money markets depressing..

  • joeCanuck

    percy,

    Should you be thinking of putting those who are the biggest gangsters pulling those economic levers up against the wall, please go to the back of the queue.

  • pippakin

    Default may be the nuclear option but it is looking increasingly like the only real option Ireland has.

    This lying government and the bent bankers may, finally, be telling the truth, but then again they may not who knows or at this point really cares because what we do now know is that we can’t afford this bailout.

    The foreign banks that loaned the money should have done their own homework.