Eurointelligence: Is Ireland Solvent (Wolfgang Münchau and Raphael Cottin, 24.11.2010)

In the long run Ireland is probably insolvent. Portugal is in a very similar position, perhaps even worse, because of structural problems that might hinder economic growth.

But in the short run, the show will go on. The readiness by the other Europeans to bail out Ireland is easily explained. The exposures by EU banks to Ireland, Greece and Portugal are massive. ...

Ireland is in a different league than the others. Unlike Portugal, Ireland could bring the house down, and that will still be the case, once Ireland's insolvency is fully realised and understood. A breakdown by countries shows that Germany and the UK are most exposed to Ireland, Spain to Portugal, and France to Greece. If the periphery goes, the European banking system will have its own subprime crisis - in addition to the actual subprime crisis.

Where are we headed now? There will be no immediate default. Ireland, and also Portugal, will come under the umbrella of the EFSF. Spain is more solid, but also highly vulnerable to a financial market squeeze. I would expect the EU to step in should Spain come under pressure. That could be through a series of bilateral programmes, or more likely an increase in the lending ceilings of the EFSF. The likelihood of such an event would be hard to predict. I would expect Spain to be ok, but Spain, too, needs to return to some solid growth.

There you go, as of the latest data available on November 24, the exposure of German banks to Ireland was of the order of €120bn.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman