- May 26, 2008
But the market doesn't seem to know what it wants. When the possibility of bondholders having to take a hit is mentioned, they go mad and the yield on our borrowing shoots up because they don't want to lose out. Then when the IMF/EU loan is put in place without any provision for bondholders being discounted, they freak out because they don't think that it will solve the underlying problems.It is about the endemic problems. If (a big if) the EU can afford to give a similar deal to Portugal and Spain (and then Italy and Belgium) it will still not solve the problem. The point is that the countries in question cannot absorb the debt and that is simply a fact. Ireland is probably the worst of them because of the tie in with the banks. However, the fact applies across the economies in question. The only thing that will solve the macro issue is quantitative easing and the only thing that will solve the Irish problem is a debt forgiveness/equity swap programme. These policies are inevitable and the investors know this. If they don't come now they'll come at some stage and European bonds will just be shorted - one nation by the next - until the correct policy decisions are made, however hard, because the investors know that they can win every time in the current scenario. Only way to solve the problem is to change the rules.