Boone and Johnson on Europe

Been a while since I linked to a Boone and Johnson piece around these parts. This one is required reading

[..] For Ireland, too, sovereign debt, including bridge financing, will rise close to 150% of GNP by 2014, and is mostly external. But a sovereign default would require a much larger bank bailout than in Greece, potentially leaving private debt almost worthless if official debt has seniority. Total haircuts don’t happen historically – except in the wake of communist takeovers – but it is hard to imagine that private creditors won’t suffer huge losses in net present value.

Given this, we should expect Greek debt yields to rise further, despite the current IMF program. Likewise, an IMF program for Ireland – which seems increasingly likely – will not bring down domestic bond yields and reopen credit markets to any kind of Irish borrower.

If people start to think this way, Portugal, whose already high and growing debt is held largely by non-residents, becomes a candidate for default as well. In that case, it makes little sense to hold Spanish debt, either, which is also mostly external. Spain’s financial exposure to Portugal and its housing-led recession don’t help matters.

And, if Spain is at serious risk of default, government solvency is at risk throughout the eurozone – except in Germany. Perhaps Italy can survive, because most of its debt is held domestically, which makes default less likely. But the size of Italy’s debt – and of Belgium’s – is worrisome.

Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.

Word has it that a few media outlets have picked up on Gav and Lorcan’s latest post. Welcome aboard if you’re a first-time reader. Make sure you’ve your spinshield at hand, Government ministers are already out talking nonsense. 

It looks likely to be a wild ride over the next few days. We should know a little more following a meeting of EU finance ministers in Brussels tomorrow evening.

Eyes-peeled for a bail-out involving Ireland and An Other which will be spun as a broader European ‘restructuring’ (possibly of the banking system, not the State, as if it’s still possible to seperate the two) by our Government and thus no fault of their own.

Sure, all the correct decisions have been made and all the right corners turned, remember. Cheapest bank bail-out in the world, lads.