Irish Bond Yields at All Time High; One Month Away From a Bailout; Pessimism Bubble "Faith-Based" Cure

Yields on Irish bonds are soaring once again. Bloomberg reports Ireland May Have One Month to Stave Off Bailout

Irish Finance Minister Brian Lenihan may have just one month to stave off an international bailout.

The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record today as Lenihan tries to put together a 2011 budget by Dec. 7 that convinces investors he can get the country’s finances in order.

The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April. That’s putting pressure on Lenihan to cut the deficit and overcome both an economic slump and the rising cost of bailing out the country’s banks.

While Ireland doesn’t need to raise money this year, its 20 billion euro ($28 billion) cash pile may only last until the middle of 2011. Lenihan will pave the way for the budget when he publishes a four-year roadmap for cutting the deficit in the next two weeks.

Ireland’s bond premium rose 13 basis points to 475 basis points today. That’s 46 basis points above the level on Sept. 30, when the country’s National Treasury Management Agency canceled debt auctions scheduled for October and November.

“There’s a pessimism bubble out there on Ireland right now,” said John McHale, an economics professor at Galway University in western Ireland. “To break that, the government’s four-year plan needs to convince investors we won’t need a bailout and we won’t default. It needs to be as detailed as possible and include legislation where possible.”

German proposals to put in place a permanent debt-crisis mechanism at EU level are also adding to Ireland’s problems, says Harvinder Sian, a London-based analyst at Royal Bank of Scotland Group Plc. While German Chancellor Angela Merkel reiterated today that she wants to force bondholders to foot some of the bill of any future bailout of a euro member, some officials argue that could spook investors at a time when countries such as Ireland and Portugal are trying to cut deficits.

“Up to last week, I would have said that Ireland could avoid a bailout by taking the measures needed to reduce the deficit,” said Sian. “Now, the measures being proposed by Angela Merkel are casting a shadow, not just on Ireland, but across the periphery.”

Faith Based Cure

It's a faith based system. Believe there will be no bailout and no default and it won't happen. Really?!

Sorry folks, especially economic professors, it does not work that way.

Interestingly, market action suggests an Irish debt blowup does not matter but a potential Greece blowup did. Your faith in the ECB hath saved you ... until of course Spain and Italy face the same problems and the Greek debt blows sky high anyway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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