Ireland Central Bank governor Patrick Honohan has been goaded into a reply by the scathing attack on the Irish bailout terms from Morgan Kelly ak.a. Dr Doom. Not much of substance in his RTE interview far; but presumably he knows something we don’t.
We are keeping our options open,” Honohan said. “We have a number of cards, we don’t have many cards, in these negotiations. There is a right time to play your most important cards,” he said.
Hopes of a major cut in the 5.8% interest rate are still alive in the context of the mounting crisis in the Eurozone, spurred by the last minute Portuguese application for a bail out and the threat of a Greek default. Joe Lynam the BBC’s (Irish born as it happens) business correspondent overoptimistically jumped the gun with a report of a bailout revision, which was formally denied by the Finance department in Dublin yesterday. His story seems to have emerged from the cloak and dagger meeting of Finance ministers on Friday which inevitably leaked, provoking another scathing comment, this time from the authoritative commentator of the FT, Wolfgang Munchau.
The core issue in the eurozone crisis is not the overall size of the peripheral countries’ sovereign debt. This is tiny relative to the monetary union’s gross domestic product. The area’s total debt-to-GDP ratio is lower than that of the UK, America or Japan. From a macroeconomic point of view, this is a storm in a teacup…
The problem is that the eurozone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage.
Munchau’s reading of the rational options strongly corresponds with Kelly’s but his warns it’s extremely unlikely the Germans will buy it.
The option to swap bonds of the European financial stability facility, the rescue umbrella, into peripheral bonds has been explicitly rejected by Berlin. This would probably have been the cheapest option but Germany wanted to nip in the bud anything that smells of a eurozone bond.
And so la lutta continua, as the Portuguese say. Or is it Shakespeare-like that an Irish revision might emerge: Out of this nettle, danger, we pluck this flower safety?