The Irish Sovereign Debt Crisis

From August 2010, financial markets’ concerns about the creditworthiness of the Irish sovereign increased significantly, due to large contingent liabilities from bank bail-outs and guarantees, as well as the direct impact on public finances of the real-estate collapse and deep economic recession. Market pressures intensified in late October; by mid-November, Ireland was requesting financial aid from the newly created EFSF as well as from the IMF. While Greece had received bilateral help from EMU countries, Ireland was the first country to receive multilateral assistance from EMU partners through a joint facility. During the crucial period running from mid-August to early December 2010, financial market attitudes towards the Irish sovereign deteriorated dramatically. The move was the culmination of a real-estate, banking and economic crisis that by 2010 had been three years in the making. Some re-pricing of sovereign bond yields had already occurred since the financial crisis hit: Ireland entered the crisis with one of the lowest risk premia in the EMU; by early 2009, they were the highest in the region. However, until then, the move had remained well contained and had little consequence in terms of Irish sovereign capacity to access external finance. Also, part of the move was reabsorbed later in 2009, coinciding with the decline in global risk aversion. However, in the space of a few weeks during the second half of 2010, the fundamental deterioration and the increasing burden of large actual and contingent liabilities related to bank rescues came to a head for the sovereign. In just a few weeks, markets not only moved Irish sovereign debt from the “good credit” to the “bad credit” category, but went so far as to place it on a par with some of the worst credits in the world, leaving the entity unable to raise finance in the private marketplace.