THE UNINTENDED CONSEQUENCES OF QE2 – IRISH EDITION

While Americans bask in the glory of QE2 and a lower dollar international investors continue to raise an uproar as their currencies rise and the race to the bottom is seen as having only one clear cut winner. The problems in Ireland, meanwhile, have only continued to multiply and we can be certain that a surging Euro isn’t helping:

“While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May.”

Andrew Wilkinson says the FOMC meeting merely took the attention off the real problems facing the world:

“After several weeks of building expectations over the depth of what the FOMC might deliver, it seems investors have quickly come to terms with its impact on the value of the U.S. dollar. While most onlookers were quick to conclude that the Fed was deliberately devaluing the dollar, it’s the parlous state of peripheral European state finances that is limiting appetite for Eurozone-based assets. That much is once again exemplified today by surging yields on Irish government debt to a record premium relative to good-old German bunds.”

(Figure 1)

The continuing European sovereign debt crisis is just one more reminder that government can’t perpetually bailout the entire world.  The problems in periphery Europe have not been resolved and will likely not be resolved until some tough decisions have been made.  Until then, we continue to whistle past the graveyard.