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irishtimes.com - Posted: August 8, 2011 @ 4:10 pm

Credit crunch II: the sovereign edition

John Collins


So three years on from the global banking implosion we have another rapidly moving crisis. This time instead of it being banks that are having “liquidity problems” and which are “too big to fail” it’s nation states. Just as the banks problems were caused by the availability of cheap credit which allowed them make crazy loans that weren’t backed by their own reserves, it has now become blatently obvious that governments were also taking advantage of low bond yields to build up massive piles of debt.

To use an Irish banking analogy, Greece is Anglo/Nationwide i.e. a basket case, Portugal, Spain and Italy are looking like AIB, caught out when cheap cash dried up and investors began to question their ability to repay. Let’s just hope Germany and France don’t turn out to be Bank of Ireland.

The one positive of this current crisis is that Ireland is no longer in the eye of the storm. At the time of writing market sentiment towards Ireland is actually improving. The yield on our ten year bonds is now “just” 9.96 per cent having been north of 14 per cent as recently as the middle of last month. That says bond investors think we are a less risky bet and Ireland might actually find its way out of this morass. And the positive corporate news today from Data Electronics Group, Jacob Fruitfield and Boston Scientific, suggest there is an appetite for investment in Ireland.

It’s hard to see where present events, which now constitute a global crisis and no longer just a European one, will lead. But the similarities with the original credit crunch suggest things could really come to a head in September. If history tells us one thing, it’s that financial markers have a habit of imploding during the Autumn. From the Wall Street Crash of 1929 to the Lehman implosion in 2008 we are heading in to the most volatile time of the year. It’s going to be an interesting couple of weeks.

Looking good for IRE ;)