At the European Parliament today, ECB President Trichet was asked whether Ireland could cope with both the sovereign and bank debt. RTE has reported as follows:
‘Following a suggestion from Fine Gael MEP Gay Mitchell at the European Parliament that it was impossible for Ireland to cope with both, Mr Trichet said Ireland had to regain credit worthiness.
‘My working assumption is that Ireland can do it, Ireland will do it,’ he said.
Speaking to the parliament’s economic and monetary affairs committee Mr Trichet said the rescue programme had been approved by the international community, not only the EU.
‘The decisions taken by Ireland over the past three years are there, and there has been a programme approved by the international community,’ he said.’
The dissenters from this view unfortunately include the sovereign bond market, which Ireland is scheduled to re-enter before the end of next year. At today’s close, the Irish ten-year bond offered 9.60 on the bid.
At this price, M. Trichet must regard these bonds as remarkably good value, and a suitable home for the ECB staff pension fund. The October 2020 issue has a coupon of 5% and has been trading recently about 72. It would be at least 100 if M. Trichet’s view was shared by the market. No distressed Eurozone member can credibly re-enter the market without selling at least some bonds at ten years or longer, and at rates below Spain’s ten-year, recently yielding about 5.15.
What precisely does M. Trichet expect to happen over the next 18 months to bring secondary market Irish yields down by the enormous amount implied by his expression of confidence? He clearly must believe that the market has got it wrong about Ireland. Does he believe things are going equally well in Greece, where the ten-year bond yields about 12.20 on the bid?
The Eurozone is in serious trouble unless his private view is more realistic.