GMP Independent Financial Advisors LLP

Tue, 23 Nov 2010 14:17:08 GMT

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Ireland’s problems have weighed on markets of late and the Irish government has now reluctantly accepted the idea of a bailout, having spent much of the last week bullishly insisting it did not need one, while sticking to its equally macho, though unlikely, promise to bail out all the country'sbanks.

This is not quite the same as the Greek problem – indeed Ireland has taken its austerity measures on the chin, in spite of some dire projections for its economic outlook over the next few years. It is not that Ireland cannot pay its debts, it is that its banks may not be able to pay their debts and Ireland has guaranteed everything.

The country seems now to have accepted the strictures of its European Union colleagues. Of course, it may have technically been right that it did not need a bailout – its banks have certainly not gone bust yet – but membership of the European Union has brought considerable benefits to Ireland and to rebel would seem churlish.

As each sovereign crisis in the eurozone emerges, commentators are quick to pronounce the death of the euro yet each crisis seems to demonstrate how strongly committed the participants are to its maintenance. Every crisis is really a manifestation of the same problem – weak countries in the eurozone cannot devalue their currencies to get themselves out of trouble. Every time a leak is plugged, it reappears somewhere else.

Although it is wise not to be smug, UK policymakers will be thanking their lucky stars that investors seem to be ignoring the weakness of sterling, in spite – or possibly because – of some punchy GDP growth numbers and some market-friendly austerity policies. Ireland, Greece and their ilk would love a significant devaluation, but it is unlikely to happen while Germany remains strong.

The European Central Bank must also take some responsibility for Ireland’s weakness. It had started withdrawing quantitative easing measures, presumably to dampen concerns about inflation in Germany, but its actions are proving extremely painful for the peripheral nations of the eurozone.

These crises are part and parcel of participation in the single currency and investors need to grow used to them. Most analysts still believe Greece will default at some point as it simply cannot implement the level of austerity measures needed to plug its deficit. However, until it is Spain or Italy out there on the slab, these crises are likely to cause temporary blips for markets – as has been seen this last week – rather than a full-blown panic.

Please call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400 for all your investment requirments. 

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