Saturday, November 13, 2010

Irish bailout tomorrow?

The FT reports that “European ministers were this weekend deliberating whether Ireland needed European Union aid ahead of Monday’s reopening of financial markets”.

Since the Irish Treasury has sufficient funds to last into the middle of next year, my read is that it does not have sufficient resources to handle a run on its banking system. (Ireland guaranteed all bank deposits two years ago.)

My prediction is that Ireland will need to be bailed out tomorrow, since this leak will only intensify the run. I have a feeling that the ECB may have conditioned further liquidity assistance on a EU backstop of Ireland’s credit.

An Irish bailout will shock the system, and will make life harder for the banking systems of the other PIIGS. It will also place the ECB in an almost impossible position. Events could move swiftly in the coming weeks.

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