Germany to the Rescue!

And so it comes to pass that my comment yesterday on the German need for a rescue package for Ireland (see WSJ blog here) is today's FT Deutschland topic du jour:

FT Deutschland reports that Germany's Finance Minister, Peer Steinbruck said that the euro area will find a way to 'circumvent the legal no-bailout clause'. Steinbruck was talking specifically about the potential need to rescue Ireland on the back of a dramatic increase in our CDS spreads - those pesky 'speculative' things that our DofF dismissed as being irrelevant minority instruments (see here).

Oh, yes. Brian Cowen can start making the rounds - cap in hand. Just don't send that embarassment-in-a-Ministerial-Merc Mary to do the job, please, and don't tell Germans that we too share their fondness for a pint... We are no longer in a polite-visit-to-Japan territory. We are in a begging mood.

Steinbruck's comment is worrisome in terms of three issues:

1. Last night, the dollar rallied and the US Treasuries yeilds compressed on the back of a flight to safety, including the outflows from European bonds. Should Ireland tap into German funds for a rescue loan, Eurozone's golden standard German Bunds will suffer. If the rest of PIIGS were to follow Irish suit, there will be a wholesale downgrade in the Bund - a calamity for the Eurozone stability. So in the end, there is an argument that a rescue of Ireland might be forthcoming, if and only if that rescue is small enough - €2-3bn would work, €10bn probably won't. But of course Ireland's need for cash is nothing close to €2-3bn. Can Germany afford sacrificing its own bonds stability to plug Mr Cowen's budget deficit? Will Germany stand by and lend money to Ireland with no strings attached? Will German loans be better termed than those of the IMF?
2. No one in the media has mentioned the turn of the phrase used by Steinbruck: that 'circumvent the legal no-bailout clause' thingy. Even in better days of global growth, international markets did not look kindly on Eurozone's penchant for arbitrarilly re-writing its own rules of fiscla and monetary stability, as was done with the Maastricht criteria earlier this decade. Now, the appetite for reckless decisions is even lower. This presents a serious problem for the Euro - young currency's credibility is based on the rules underpinning its existence. Should these rules be 'circumvented', we may kiss good-by the idea of a stable Euro.
3. Steinbruck's comments on Ireland did nothing to explain his view of the risks facing the Eurozone in the context of reckless Irish spending and economic management. This might be signaling that instead of economic stability concerns, Steinbruck was thinking about political issues. Will German rescue of Ireand come at the expense of forcing this country to ratify the Lisbon Treaty? Quite possibly so. Blackmail has been used by the EU before - most notably in the agreements with Norway and Switzerland and in the case of Nice Treaty vote in Ireland, as well as in the case of the Danish rejection of the Maastricht Treaty.

Oh, dear...