Tuesday, November 16, 2010

Will the Irish rescue plan work?

Here is what I expect to be the EU’s Irish rescue plan:
  • The EU lends Ireland around EUR 100B to recapitalize its banks;
  • This “allows” the ECB to continue to lend to the banks;
  • Ultimately, the banks regain market access and all is well.

Here is what I see as the problem with this plan: it will ultimately result in the ECB becoming the Irish banks’ sole creditor; and it will expose the ECB to perhaps EUR 200B of Irish bank exposure. Also, I don’t expect the Irish banks to regain market access without a credible guarantee from a AAA rated entity (either the ECB or the EFSF).

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