Much of the detail of today's Irish bailout has been well trailed. But that is not to say it does not contain surprises.
First is the statement that the Irish government will hold no more bond auctions this year. Second, is the pledge from Brian Lenihan, Ireland's finance minister, that he will accelerate the speed of tightening in his next budget (details are likely to be announced in the pre-budget outlook in late October).
The financial markets like the sound of both of those initiatives (instead of regarding the bond auction's moratorium as a sign of weakness, which they could do, they've decided to view it positively for now).
But vital questions remain. It seems likely that the various EU authorities will come out with statements voicing their confidence in Ireland in the coming days — indeed, the EU commission has already declared its support this morning.
However, will this burst of enthusiastic words be backed up by increased official buying of Irish government bonds by the European Central Bank?
And what of the "worst case" given by Lenihan for the banks' losses. Is it the "worst case" or do the markets assume he is actually giving them the "real" situation? Despite today's action, uncertainty will continue to be high regarding Ireland's near-term economic prospects. Not least because much depends on factors — such as the size of any additional ECB purchases — that are outside the Irish government's control.
Nevertheless, there is cause to be cautiously constructive. Although the costs of the rescue are enormous — driving Ireland's debt-to-GDP ratio to close to 100% of GDP — the Dublin government and Ireland's central bank have gone some way to removing immediate doubt surrounding those costs.
In delaying the next bond auction until 2011, they have provided themselves with a breathing space. They can now try to use the budget to regain the upper hand.
Kevin Daly is senior global economist at Goldman Sachs
