Irish whirlpool

If an explanation were needed for the financial storm that on Wednesday pushed the risk premium of Ireland, Portugal, Greece and Spain to levels last seen during the crisis in May, the main cause would have to be the lack of confidence felt by the markets over Ireland's ability to resolve the problems in its banking sector and the permanent doubts over the involvement of Germany in European bailouts.

Ireland, which was responsible for the convulsion in bond differentials on Wednesday, has a financial system that's on the brink of bankruptcy, and the expensive recapitalization plan designed by the government has raised suspicions in its own central bank and in Europe. The most likely outcome is that bankruptcy will force the country to default if it does not apply for a loan from the ¤750 billion European Rescue Fund, with clear and sufficient requests.

When they refer to the Rescue Fund, the markets look to Germany. When a crisis breaks out, such as that of Ireland, investors speculate on the conditions that Angela Merkel, Finance Minister Schäuble and the Bundesbank will impose on the operation. The speculation in the Irish case indicated that Germany could impose a substantial deduction of debt. Calm will only return to the markets when the German authorities decide to announce that they will not place onerous conditions on the rescue of Ireland.

The political problem is nearly as serious as the financial one. It appears that it is not enough to set up a rescue mechanism for Europe. Nor is it enough for the governments on the periphery of the euro zone to have committed to painful cutback programs. It appears to be necessary and urgent to outline the tiniest details in terms of rescue protocol in order to avoid a semi-catastrophic situation occurring in countries that are disconnected from Ireland.

Greece and Portugal are always up against the wall; on Wednesday, their debt differentials were close to 1,000 basis points and 500 basis points, respectively.

The Spanish economy is suffering less punishment than Greece and Portugal; its cutback plan is in order and its banking system, while pending a recapitalization, is more solid than the European average. But it is vulnerable to financial storms, and as such, cannot permit mistakes such as not quickly concluding financial reforms, tackling the deficit or wavering on the other issues that are pending.