In today’s Irish Times Derek Scally reports on an interesting interview with German Finance Minister, Wolgang Schäuble. (Edited transcript available here.) Overall, Mr. Schäuble comes across as thoughtful and strongly committed to finding a way through the crisis that preserves the euro zone. But the claim that further official assistance in the form of relieving some of the burden of banking-related debt could worsen Irish prospects is not convincing.
Put yourself in the shoes of a potential investor in Irish debt. On hearing of a reduced burden on official debt, would you: (a) upgrade your view on the ability of the Irish State to avoid default on private debt based on its improved financial position; or (b) panic because the situation must be worse than previously believed, or else the increased official support would not be forthcoming? I would think that potential investors are well aware of the objective facts of Ireland’s situation. One of these facts is the extent of available official assistance.
Of course, the German government can choose not to support actions aimed at “further improving the sustainability of the well-performing adjustment programme” (July 29th communiqué). But this argument for withholding such support should be strongly challenged.
(It is noteworthy that Jörg Asmussen, a member of the Executive Board of the ECB, made a similar argument in his IIEA speech in April – see here.)