By David Mc Williams
In terms of reading the economic tea leaves, last week’s cup of data has left behind a perplexing residue, with some good bits, some bad bits and lots of confusing bits, which could go either way. However, it is a crucial week because the evidence suggests that something very odd is happening in Ireland. The Irish bond market is decoupling from the Irish economy. That sounds weird, but let’s dig a bit to explain.
The news from the financial markets – Ireland being able to borrow again – is unambiguously good. There are a few gripes, like the interest rates, but it would be churlish not to see this as a positive – and indicative of a likely bank deal which will see a dramatic easing in the overall debt position of the state.
Obviously, there is a long road still to go, but the markets clearly believe that the bank debt mutualisation deal hinted at in Brussels last month will be delivered.
So far so good, but at the same time, the data from the real economy was awful, and the news from the banking system, as well as local credit conditions, is equally desperate.
In another development which will form the background music to the next few months, ECB president Mario Draghi has signalled that he is going to take the Germans on and has fired the opening salvos in what will prove to be a titanic battle for the hearts, minds and balance sheet of the ECB. He will buy government bonds directly.
So it has been quite a week.
Let’s deal with the decoupling idea
- Euro Watch: E.C.B. President Talks Up the Euro, and Lifts Stocks (nytimes.com)
- ECB ‘ready to do whatever it takes to preserve the euro’ (ekathimerini.com)
- ECB Update: ECB Has ‘No Taboos’ As Crisis Reaches New Height (forexlive.com)
- ECB chief hails Irish efforts on economy (newstalk.ie)
- Bonds weaker on Draghi’s comments (news.theage.com.au)
- The Secret Tool Draghi Uses to Run Europe (forbes.com)