The Guardian on the Euro Crisis

Euro crisis worsens after bond investor says cash will be taken out of Ireland
• Ireland’s banks described as ‘bleeding deposits’
• Euro falls as fears over Portugal increase
• Jill Treanor and Larry Elliott
•, Tuesday 23 November 2010 21.23 GMT
• Article history

A woman enters a euro discount store in Dublin. Ireland is coming under further pressure with knock-on effects on the euro. Photograph: Peter Morrison/AP
The world’s biggest bond investor tonight inflamed the growing crisis engulfing the eurozone by virtually inviting depositors to take their money out of Ireland’s stricken banks.

In a day of turbulence in the currency markets when the euro plunged more than two cents against the dollar and share prices fell heavily in Europe and North America, expectations mounted that Portugal would quickly follow Ireland in calling in the International Monetary Fund and the European Union.
Tensions between North and South Korea further strained nerves in already febrile markets, while Germany admitted that the future of the euro was at stake through the Irish bailout.
Mohamed El-Erian, chief investment officer of the powerful bond manager Pimco, added to the anxiety by describing Ireland’s banks as “bleeding deposits”. He said: “What you advise your sister in Ireland now is that you’d say take your money out of an Irish bank and put it in another bank headquartered elsewhere. That’s what happened in Argentina and in emerging economies. People worry about their savings.”
His comments were immediately denounced by Ireland’s central bank which said there was “no basis for concern” and all deposits were guaranteed by the government.
But the central bank’s admission that major international companies had been withdrawing their funds from Ireland highlighted the increasingly anxious mood of the markets on the eve of the government’s four-year fiscal plan, which is crucial to talks with the IMF and EU.
El-Erian, who was interviewed by the Bloomberg news agency, said the Irish government needed to conclude those negotiations to restore confidence in the banking system.
“It will seriously undermine the prosperity of this country for a generation. The first thing they must do is execute on what they announced this weekend, which is a big external aid package and steps by the Irish government,” said El-Erian.
His remarks were made amid signs that the authorities had failed to use Ireland as a fire-break for the crisis which now risks enveloping Portugal and even Spain. The cost of borrowing for both countries rose yesterday. Spain did not manage to raise as much money as it had hoped in its regular bond auction and was forced to pay more to raise the funds.
Jim O’Neill, chairman of Goldman Sachs Asset Management, warned that the Irish rescue package did not solve the problems at the heart of the single currency.
“Unless there’s an underlying solution to not just the debt challenge, but also to … how European monetary union sits together involving all these domestic political partners, how can we forget about the problems lurking with Portugal and Spain,” O’Neill said in a TV interview.
Other market experts were also concerned about the eurozone. Graham Turner of GFC Economics said the solution for weak members might be for Germany to walk away from the single currency.
He suggested that Austria, Finland, the Netherlands and Germany could form a new deutschemark bloc which would allow the other 12 members of the eurozone to devalue and reflate their way out of the crisis. “It has to be a better option than the present straitjacket of a single currency,” said Turner.
Stock markets tumbled as anxiety about contagion from Ireland was exacerbated by news, just as European trading began, that North Korea had shelled the South Korean island of Yeonpyeong, near their disputed western border.
In Europe, London’s FTSE 100 index closed 95 points lower, or 1.8%, at 5581.28 while Germany’s DAX tumbled 1.7% and the CAC-40 in France ended 2.5% lower. Spain’s Ibex closed down 2.8% and Portugal’s PSI 2.1%. Even better than expected US data could not prevent Wall Street’s Dow Jones industrial average falling 1.5% by midday.
Irish bank shares were again hit hard amid expectations they face nationalisation unless buyers can be found. Central bank boss Patrick Honohan invited bidders. “They [the banks] are for sale as far as I am concerned. I have been an advocate for a number of years for small countries to have foreign owners for their banks,” he said. US billionaire Wilbur Ross said he was “very far along” in the process of buying a bank. The woes of the sector were illustrated by Bank of Ireland, 36% owned by the taxpayer, which will tomorrow try to raise cash by selling more than 150 of its prized paintings and sculptures at Dublin’s Shelbourne Hotel.
The euro fell to its lowest level in two months of 1.3377 against the dollar.
The German parliament was told of the gravity of the situation by the finance minister Wolfgang Schäuble. “Our common currency is at risk,” he said, if Germany did not play its part in bailing out Ireland. Without participation, the “economic and social consequences for our country will be incalculable”.
The chancellor, Angela Merkel, echoed his remarks. “We’re in an extraordinarily serious situation, as far as the situation of the euro is concerned,” she said.