November 14, 2010 / 8:08 PM / in 9 years

Fading luck of the Irish

WASHINGTON (Reuters) - It is difficult to believe that financial turmoil in a country as small as Ireland, whose economic output roughly matches the state of Maryland’s, could have worldwide repercussions.

A beggar sits on O'Connell Bridge in the centre of Dublin, Ireland October 2, 2010. REUTERS/Cathal McNaughton

Yet in an interconnected global banking system, the island nation’s troubles have captured the attention of investors, who are now looking for signals that some sort of bailout package is imminent.

A raft of data from the United States, most prominently retail sales and inflation, will also be on the radar as analysts look for clues as to whether a recent firming in growth signals the start of a turnaround.

With consumer prices outside food and energy expected to climb just 0.7 percent from a year earlier, which would be the lowest since the early 1960s, markets might find some comfort from the likelihood of continued monetary easing by the Federal Reserve.

At the same time, October retail sales are expected to show a 0.7 percent jump, putting businesses in that sector on a solid footing ahead of the holiday shopping season.

U.S. economic activity appears to be picking up steam, returning to levels seen just before European debt troubles, then focused on Greece, began to hinder bank lending.

Unfortunately, those same problems were now reemerging.

“The market has been hijacked by this,” said Win Thin, currency strategist at Brown Brothers Harriman in New York. “Even the G20 spent more time talking about Ireland than the global imbalances.”

Indeed, the Group of 20 nations failed to produce very much in the way of concrete targets to address ongoing disputes over global exchange rates.

Critics say China keeps the yuan unfairly low by pegging it to the dollar, while many emerging nations have begun to blame the Fed’s ultra-low interest rate policy for fueling bubbles and excessive appreciation of their currencies.

But Ireland stole the show. The country is in talks to receive emergency funding from the European Union and is likely to become the second euro zone country, after Greece, to obtain an international rescue, sources said on Friday.

Irish borrowing costs have shot to record highs this week, pushing European interbank borrowing costs up, because of concern about the country’s ability to reduce a public debt burden swollen by bank bailouts. There are also worries that private investors will have to take a hit in any eventual restructuring of the debt.

“This is really a banking crisis,” said David Wyss, chief economist at Standard & Poor’s. “If you look at the subprime mortgage crisis in the U.S., Europe is seeing the same thing now.”

These roadblocks to healthy lending come at a perilous time for Europe, which on Friday reported weaker readings for third-quarter economic growth, even in stalwart Germany, which expanded just 0.7 percent.

The EU may want to calm investors with an Irish bailout to prevent the collapse of market confidence from extending to other indebted countries such as Portugal and Spain.

The Irish case is fascinating — and scary — because of its similarities to problems seen in larger, richer nations like the United States and Britain.

A pedestrian walks past a discount store in central Dublin November 14, 2010. REUTERS/Cathal McNaughton

In an effort to stem a run on its banks, the Irish government decided to guarantee the debt of its financial institutions, which at the time was believed to be relatively small. But as those estimates have ballooned, the country’s standing as a sovereign borrower has come into question.

For the United States and Britain, among others, the story is a cautionary tale between stop-gap measures intended to support a fragile banking system and a blanket guarantee that simply transfers risk from the private sector to an already overburdened taxpayer.

(Additional reporting by Jan Strupczewski in Brussels and Padraic Halpin in Dublin)

Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler

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