At the risk of adding to the gloom, here is Willem Buiter’s widely discussed “Sovereign Debt Crisis Update.”
Despite the recent drama, we believe we have only seen the opening act, with the rest of the plot still evolving. Although we have not had a sovereign default in the AEs since the West German sovereign default in 1948, the risk of sovereign default is manifest today in Western Europe, especially in the EA periphery. We expect these concerns to extend soon beyond the EA to encompass Japan and the US.
Accessing external sources of funds will not mark the end of Ireland’s troubles. The reason is that, in our view, the consolidated Irish sovereign and Irish domestic financial system is de facto insolvent. The Irish sovereign cannot from its own resources ‘bail out’ the banks and make its own creditors whole. In addition, a fully-fledged bailout (permanent fiscal transfer) from EA partners or the ECB is most unlikely. Therefore, either the unsecured non-guaranteed creditors of the banks, and/or the creditors of the sovereign may eventually have to accept a restructuring with an NPV haircut, even if it is not a condition for accessing the EFSF or the EFSM at present.