by Calculated Risk on 11/09/2010 01:44:00 PM

UPDATE: Two days after this post, I posted Ireland: Bank funding problems?

Ireland is fully funded until mid-2011, however I've heard this morning that certain European investors are no longer willing to provide Irish banks with overnight funding. This could lead to a serious liquidity problem for the Irish banks - and some investors believe that Ireland may need to borrow from the IMF or the EFSF to support the banks.

Original post:

I've been posting on Ireland recently because the 10-year bond yield is approaching 8% (some analysts think Ireland will use the European Financial Stability Facility (EFSF) above 8%). The Ireland 10-year yield hit a record 7.94% today.

To be clear: Ireland is not Greece. There is no short term liquidity issue; Ireland does not need to borrow until mid-2011 and rates could fall before then.

The increase in yields is being driven by investor fears of a permanent
crisis-resolution mechanism that will include possible haircuts for private investors.

Here are some excerpts from a proposal from the think-tank Bruegel about a permanent
crisis-resolution mechanism (Via the WSJ Making Default A Real Possibility):

We propose in this paper the creation of a European Crisis Resolution Mechanism (ECRM) consisting of two pillars:

A procedure to initiate and conduct negotiations between a sovereign debtor with unsustainable debt and its creditors leading to, and enforcing, an agreement on how to reduce the present value of the debtor’s future obligations in order to re-establish the sustainability of its public finances. This would require a special court to deal with such cases. The European Court of Justice is the natural institution for this purpose and a special chamber could be created within it for that purpose.

Rules for the provision of financial assistance to euro-area countries as an element in resolving the crisis. Should a euro-area country be found insolvent, the provision of financial aid should be conditional on the achievement of an agreement between the debtor and the creditors reestablishing solvency. The task of supplying financial assistance could be given to the EFSF provided that it is made permanent and an institution of the European Union. Lending by the permanent EFSF could also be provided, under appropriate conditions, to euro area countries facing temporary liquidity problems, as currently foreseen by the temporary EFSF.

This is similar to some of the recent German proposals.

Right now this is a side show (but still interesting).