Ireland's bank rescue has begun to unravel despite a blanket debt guarantee for the country's top lenders, prompting concerns that Europe's credit crisis may be entering a second and more menacing phase.
The Taoiseach, Brian Cowen, told the Irish parliament yesterday that he was exploring "all options" to shore up the banks after the collapse of their share prices over recent days.
While talk of a fresh bail-out has helped revive the battered stocks of Anglo Irish, Bank of Ireland and other lenders, it appears merely to have shifted the risk to the Irish state itself.
Michael Klawitter, a strategist at Dresdner Kleinwort, said the cost of insuring Irish sovereign debt through credit default swaps (CDS) has surged to 133 basis points. "The markets have begun to see a risk to the solvency of the Irish government. They are questioning whether it has the financial muscle to back up the guarantees," he said.
This is a disturbing pattern across Europe as the global credit crisis drags on, with extreme cases in Iceland, Ukraine, Russia, Hungary and Latvia. There are fears that investors could start to shun sovereign debt in Western states where banks have outgrown the underlying economy.
Ireland is vulnerable because financial services make up 9.8pc of GDP, including its 'Canary Dwarf' enclave of hedge funds. The liabilities of its lenders are twice Irish GDP. Britain, Switzerland, Belgium, Austria and Luxembourg are in the same boat.
Emphasis added by me.
There are only about six weeks left to this blog.
For eleven months I have screamed about Depression 2.0 coming.
It's now here.
For the next six weeks or so, you will now hear me screaming about the only possible solution: 777 all of it.
It's gotten to All Sink or All Swim.
Everyone will be left holding a bag of nothing. Everyone can wind up with nothing after the collapse and ruination of everything or they can wind up with a bag of nothing with nations and societies and companies still intact and all eager to rev up and have another go at things.
We've forgiven debts of other countries.
It's time for all of us to wipe every slate clean.