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Alan McQuaid, senior economist at Bloxham Stockbrokers, looks at the fallout for the EU and Ireland following the Greek crisis.

The current feeding frenzy in bond markets over highly-indebted southern euro zone states recalls the runs on European currencies in the 1990s before the euro was created. European governments eventually saw off that challenge with a sustained display of political determination backed by central-bank intervention to defend the European Monetary System. Whether they can overcome the ongoing panic about sovereign-default risks in the single currency by showing strong political resolve and the promise of some financial assistance if needed, remains to be seen.

Then as now, traders made money by probing perceived weak links in the EU, forcing the Italian lira and the British pound out of the exchange rate mechanism in 1992 and repeatedly attacking the French franc. Then, as now, there were accusations that the attacks were driven by anglo-saxon speculators hostile to European monetary union. After a four-year battle that began in 1992 when Denmark rejected the Maastricht Treaty in a referendum, political will eventually prevailed over market forces. The last great challenge to the franc-deutschemark exchange rate at the heart of the ERM was repelled in 1995, once new French President Jacques Chirac had made clear his determination to pursue orthodox fiscal policies.

Today's debt crisis is both similar and very different. The mounting market frenzy feels eerily similar. It began with pressure on Greece, the country with the biggest public-finances problem in the 16-nation euro but has spread to Portugal and, to a lesser extent, Spain. However, Greece remains the main focus of attention for the time being and, in many ways, has become the pivot around which Europe now spins.

Similar market alarm over Ireland in 2009 was eased when the then-German finance minister Peer Steinbrueck brought calm by saying that all the euro zone countries would help "if it came to a serious situation", seen as an effective guarantee. With the current Greek crisis, Steinbrueck was out of office and other policymakers offered much more mixed signals. In any case, this time markets wanted more.

 At the end of the day, the question is whether the EU can enforce budget discipline rules on "peripheral" Euroland states which its "core" members mostly failed to respect over the last decade. Compounding the problem, those countries have lost economic competitiveness, and fiscal austerity will further slow their recovery from recession. Euro zone countries cannot devalue their way out of trouble. The alternatives for Greece are to make painful and politically risky cuts in public spending, to seek a bailout or to default. Athens has to refinance €54bn in public debt this year, €20bn of it in the second quarter.

While markets could react badly if Greece does not obtain concrete EU aid, investors may also downgrade the euro zone if Greece does get help. The zone's members, including Germany and France, have broken budget rules repeatedly in the past decade. But extending aid to a country that has violated the rules so flamboyantly would further undermine the Growth and Stability Pact which is supposed to prevent weak states from abusing their membership  at the expense of strong ones.

So the ball is clearly back in Greece's court. But whether it is Greece, Portugal, Spain or, indeed, Ireland, I still believe the desire/ability of political leaders in the countries under scrutiny to implement tough spending cuts to get their public finances back in order will ultimately dictate how their government bonds are viewed by financial markets in coming months.

And in this regard, Ireland is shaping up quite well. Policy adjustment will bring its own reward of credibility in the eyes of investors and Ireland is the reference in this respect. It is significant that Irish sovereign debt has not come under severe pressure at the present time. Ireland's issuance target for this year is €20bn, with 40% of this already completed. Ireland's general government debt/GDP ratio was 64.5% at the  end 2009, up from 44.1% at the end 2008, but still well below the euro zone average of 78.2%.

However, general government debt is a gross measure and does not allow for the offsetting exchequer cash balances or the assets of the National Pension Reserve Fund (NPRF) against the gross position. On a net basis, Ireland's debt/GDP ratio was 38% at the end of 2009. Furthermore, as a result of the National Treasury Management Agency's (NTMA) policy of locking in long-term borrowing at historically low levels of interest, some 95% of Ireland's national debt now carries fixed rates of interest, protecting the exchequer against the effects of rising interest rates.

Meanwhile, on the economic side, the general view among analysts is that the global recovery will be driven by exports, and if that is the case, then Ireland is in a better position to benefit than many other euro zone countries. The bottom line is that I believe the yield on benchmark Irish 10-year government bonds will be trading below those of Greece, Portugal and Spain come year-end, in market recognition of Ireland's prudent fiscal austerity measures.

 But, the blunt message for the EU and Greece is that to price risk accurately, markets want clearer guidance on support and conditions attached. Then, everything will depend on Greece's political ability to push through reforms in the face of social unrest. Pricing that purely political risk should still offer a challenge, not to mention market rewards for those who call it right.

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