The Return Of Contagion.

Nov. 14, 2010 - PRLog -- Remember the strap-line from the movie, Jaws2? “Just when you thought it was safe to go back in the water”: If you do, then you’ll also recall being unable to fathom how those that actually did go back in could be quite so foolish. That same bemusement afflicts the analysts at “Continental-Trade” when attempting to understand how some investors could even begin to imagine that the Eurozone sea of debt could be made safe with the bailout of Greece.

Following the unprecedented hyperbole surrounding the global sideshow that was the 9-week preamble and eventual release of Quantitative Easing Two – The Sequel, investors’ attentions returned to the progress being made on the next development in the ongoing drama being played out on the peripheries of the European Union. They duly found it. Ireland, the plucky little powerhouse export economy that got way out of its depth during a long housing boom and then made things worse when it made a commitment to stand behind its banks following the collapse of Lehman Brothers in 2008, is on the brink.

Despite eye-watering austerity measures imposed on its citizens, the nation looks certain to join Greece in suffering the ignominy of tapping the EU/IMF for access to the EFSF (European Financial Stability Facility) with its near $1 trillion war chest which, as one “Continental-Trade” analyst noted, “No one really understands the inner workings of”.

As if that were not enough, both Germany and France are calling for bondholders to take “a haircut”, the euphemism for debt restructuring where creditors (bondholders) extend the maturities or accept payment holidays until the debtor recovers. While that might seem fair considering the bondholders should have done their homework before taking on the risk of buying Ireland’s debt, the fear is that said haircut would make other investors demand higher yields on sovereign debt issued by ALL EU nations in return for the perceived higher risk at a time when nations most need access to funding. This, in turn, would drive up interest rates and potentially drag Europe back into recession.

“Continental-Trade” conceded that EU ministers have said that such haircut stipulations won’t come into effect until 2013 but, with Germany’s Angela Merkel facing pressure at home from an electorate fiercely opposed to bailouts of other nations with their taxes, investors holding Spanish, Italian and Portuguese sovereign debt could be in for a rude awakening when – not if – those nations find themselves in Ireland’s situation.

“Germany and France may not be as belligerent with Ireland as they were with Greece seeing as the Irish government has shown an incredibly strong commitment to debt reduction with its austerity measures whereas the Greeks spent most of the time complaining but with Spain, Italy and Portugal, it could be an entirely different story; those bondholders could be hung out to dry. And rightly so”, said the “Continental-Trade” analyst.