Irish officials resisted intensifying calls for the nation to accept a bailout as euro-zone finance ministers prepared to meet Tuesday, insisting the government is capable of fulfilling its debt obligations until the middle of next year.
But that misses the point, economists said. The debate centers on worries about the state of the nation’s troubled banks rather than Dublin’s sovereign-debt obligations for the near term.
European officials are reportedly cranking up pressure on Ireland to accept a bailout in an effort to keep Dublin’s fiscal woes from driving up borrowing costs in Spain, Portugal and other so-called peripheral countries in the euro zone.
Meanwhile, the cost of insuring Irish debt against default rose after declining from record levels Friday and Monday. The spread on five-year Irish credit default swaps widened to 515 basis points Tuesday morning from 497 points on Monday, according to data provider Markit.
The Portuguese CDS spread widened 12 basis points to 425, while the Spanish CDS spread widened to 255 basis points from 250 and the Greek spread widened to 900 basis points from 853.
The EU is basically begging Ireland to take its money. Ireland says it doesn’t need it, at least not now. But the EU is not really trying to help Ireland here. It is trying to show the world that it stands behind the EU nations. The EU is trying to help Spain, Portugal, and Greece by lending to Ireland. But why should Ireland hurt its reputation for those countries?
This “selfishness” is spreading across Europe:
According to Dow Jones (via ForexLive) Austria has decided to withhold its contribution to the Greek bailout, citing failure to make progress on finances.
This is obviously a pretty big problem, since that will spur others to wonder why they’re still contributing to the bailout fund.
So, debtors are refusing to borrow from the EU and creditors are refusing to support the debtors. The European Union is not looking very unified right now.
Anybody who studied basic economics learned that cartels cannot survive forever. From wikipedia:
Game theory suggests that cartels are inherently unstable, as the behaviour of members of a cartel is an example of a prisoner’s dilemma. Each member of a cartel would be able to make more profit by breaking the agreement (producing a greater quantity or selling at a lower price than that agreed) than it could make by abiding by it. However, if all members break the agreement, all will be worse off.
The incentive to cheat explains why cartels are generally difficult to sustain in the long run. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, one private cartel operated peacefully for 134 years before disbanding. There is a danger that once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed.
We are now seeing the EU cartel fall apart. While it is unlikely the EU will disappear entirely, it appears to losing power as individual countries restore their economic sovereignty.