The EU is spooked by the Irish general election. It’s point man, Olli Ilmari Rehn, the European Economic and Financial Affairs Commissioner, used this week to tell us there’ll be no haircut, no question of defaulting on the bank bonds. The rate may be adjustable, lads, but forget the debt. But since many international economists and analysts concur that loading an economy like Ireland with debt it can’t handle is simply bad business, what’s really going on?

The Germans and French would have us believe that it’s all about moral hazard, you know executing an admiral from time to time – pour encourager les autres - as Voltaire once put it. But I don’t think so. There’s an overwhelming economic logic to reducing the Irish debt load to something we can actually pay back, so what’s got the EU so jumpy?

Think about Irish bailout as a temporary bandage until the EU gets its act together with a resolute action  plan - one  that convinces markets and you tip toe closer to the truth. Ireland is the pin. Spain in the grenade. This year Spain hopes to refinance close to €100 billion of Government debt, starting with nearly €21 billion in April, which is why there’s a rush on to fix the European bailout model by end of March. That Portuguese bonds are nudging again towards the tipping point of 7.5% isn’t helping nerves. Neither are reports of Election pledges coming from Ireland. So what is it about Spain that’s frightening the horses so?

• Spain is Europe’s third largest economy and is as big as Greece, Ireland and Portugal combined which means its too big to save with the current EU bailout fund even if the fund is allowed to borrow more money.
• Spain's central and regional governments and its banks need to raise about €290 billion in gross debt this year – that’s a lot of cash even if the Chinese decide to support again.
• Spanish property indices are based on asking prices and only recognise price falls of just 12% but anecdotal evidence suggests that the real fall is more like 30% to 40%. Sound familiar?
• Spanish banks have reserves to meet bad debts at 2.7% of loans, that’s nearly half the level in the USA but Spain has double the unemployment level at 20%.
• Total write off’s so far are €45 billion but the lending portfolio is €1 trillion.
• The real concern are Spain’s savings banks (cajas de ahorro), which like the Irish Nationwide, aren’t publicly quoted so are difficult to see inside- except through regulators and Goverment.

No wonder the EU is fretting. There may be scope to restructure the Irish bailout deal but it ain’t going to happen until the EU has got its act together and Spain is saved from our fate. Oli won’t admit to that for obvious reasons but that’s the view from here.

Stimulating Stimulus!
The new Government might like an idea to stimulate productivity and spending but that doesn't cost a bob; Allow workers – that excludes owner directors and employed relatives – to earn extra cash over and above this year’s salary, tax free until Christmas 2012. Then the extra income forms part of taxable earnings into 2013. Course you’d need to place a reasonable cap like €30 grand in extra earnings and to exclude pipeline promotions and public sector increments, so that the scheme would focus on real productivity and encourage employers to develop genuine schemes.  Employer and employee declarations could discourage tax evasion if properly constructed

Fixing Trackers
As predicted throughout last year, fixed rates are on the move signaling increases in the ECB base rate about 6 months away. Thing is rate rises will be higher and faster than conventional thinking expects. The ECB base rate, now at 1%, was 4% before the 2008 crisis. Inflation is on the march throughout the fast growing parts of the global economy and economies such as the UK with has printed money to fill the holes in its banks and stimulate the economy is seeing inflation at 4% - in the teeth of an austerity drive. Why? Because of money debasement (monetary inflation) and energy (commodity-led inflation). The EU isn’t immune. So if your variable or tracker mortgage is accounting for much of your income ie over 20%, it makes sense to buy certainty because you may not be able to handle volatility of monthly mortgage repayments. So check out long fixed rates – if it’s not too late. Most providers have shifted fixed rates expecting a modest ECB adjustment but these will shoot a lot higher as fears of high inflation gathers in markets.