In Ireland, the initial crisis was not that the government was overextended, but that its banking sector was. As its banking sector imploded, the ECB and the IMF stepped in, and the debt is to be eventually taken on by the Irish government. And rightly so, the Irish people are not too thrilled with it. Recently Ireland had elections and the people are hopping mad. They don't want to pay for the speculative losses incurred by outside investors. They want the senior bondholders of Irish banks and Irish sovereign debt to share this pain.
So who are these senior bondholders? From the Irish Tribune, emphasis mine:
The chief buyers of Irish bonds are large European asset managers, particularly Germany, followed by France. Union Investment, one of the four largest asset management firms in Germany, is a significant buyer of Irish debt. Pioneer Asset Management, which has a large operation here, is also a substantial investor. It is a subsidiary of Italian bank UniCredit.
Capital Research, part of the Capital Group Companies, is also an investor. This company has also taken stakes in a large number of Irish listed companies. Italian fund Fondaco is also an investor, as is Clerical Medical Investment Group, a division of Lloyds, which also bought up debt in recent years in Anglo Irish Bank. The rest of the buyers of Irish debt tend to be major European banks, such as Fortis and Deutsche Bank, which often purchases bonds through its DWS Investments arm.
...As many have alleged, there is a lot of crossover between Irish government and bank debt. Put simply, large French and German asset managers invest in both. In the case of AIB, Pioneer Asset Management is a large investor, as is Deka International, a division of German Deka Bank. Fondaco is also an investor in AIB and government debt. Other investors in AIB with large bond holdings are Barclays, Aviva and Julius Baer, a Swiss wealth manager.SOURCE
Will the Irish get their way, and like Iceland before them, tell these bondholders to suffer for their investments? In comes the ECB with a stern warning to the people of Ireland, emphasis mine:
THE EUROPEAN Central Bank has warned Ireland against taking the “populist” step of forcing private bondholders to share the cost of the financial crisis.
ECB chief economist Jürgen Stark said the time had come for the ECB to end emergency intervention in the money markets. In particular, Irish banks would have to be weaned off ECB liquidity.
“It can’t be an ongoing thing,” he told the influential Frankfurter Allgemeine newspaper. “According to the parameters of the EU-IMF programme the recapitalisation of Irish banks should have ended last February, but the last Irish government didn’t want to take on that responsibility.”
Asked if he supported the idea of Ireland sharing the cost of its crisis with bondholders, he said: “That would be a populist move, but one has to think of the consequences. The ECB is worried that in Europe and in other parts of the world that it would come to a new wave of insecurity.”
“Therefore we are warning the Irish Government in case it wants to solve its problems at the cost of bondholders.”SOURCE
The ECB is not mincing words here. But it's not like everything will be fine if the senior bondholders feel the pain as well. Contagion is the word here. What if Greece does this? Or Portugal, or worse yet, Spain? And is it really that unavoidable? How can one country choose to stiff its creditors, and another country, equally burdened by debt, just sit by? I think that the austerity measures will slowly crush these periphery economies and tremendous political turmoil will result. One way or another, there will be a sharing of pain, and with it, a new view of sovereign debt will emerge.
Europe has many problems that have not been addressed at all. Nothing has been done about the trade imbalances within the Eurozone that have contributed to the subsequent debt imbalances. This will be the ultimate test of the Euro.