Doomsday scenario as euro casualties keep struggling

European politics now increasingly dominates European economics. Commenting about the EU bailout of Ireland, the Irish Times referred to the Easter Rising against British rule, asking: "Was that what the men of 1916 died for, a bailout from the German chancellor with a few shillings of sympathy from the British chancellor on the side?"

An Irish radio show played the "new Irish national anthem" to the tune of the German anthem. In Greece, the severe cutbacks in government spending have resulted in strikes and violent protests on the streets of Athens.

In many countries, governments, often unstable coalitions, are struggling to pass legislation, implementing necessary spending cuts or tax increases. In Germany, the paymaster and strength behind the EU, Europe's biggest tabloid Bild asked: "First the Greeks, then the Irish, then will we end up having to pay for everyone in Europe?"

In December, a special EU meeting, convened to discuss the situation, provided a clear pointer to how events might evolve.

The German view, set out by Chancellor Angela Merkel, prevailed. A key element was the requirement for "collective action clauses", effectively forcing lenders to bear losses.

The provision, which must be included in all European government bonds after June 2013, would require the payment period to be extended in case of a crisis. If solvency problems persisted, then further extension of maturity, reductions in interest rates and a write-off in the principal would occur.

New bailout funds would automatically take precedence over existing debt and have to be paid back first. It is clear that the stronger members of the EU, led by Germany, have decided to limit future liability in bailouts.

Unless confidence returns rapidly or the EU changes its position, it seems restructuring or defaults by several peripheral European sovereigns may be unavoidable. The safety nets introduced for Greece and Ireland are now seen as unlikely to be big enough to rescue larger countries, like Spain and Italy, if they require support. Investors will need to take losses.

This month, Portugal and Spain have managed to issue debt successfully, giving investors confidence, temporarily, that the problems are manageable. However, in Portugal's case, the debt carried a yield of 6.7%. Portugal's 10-year bonds briefly reached 7% this month, a level investors demanded from Greece and Ireland shortly before both countries finally capitulated and accepted bailout packages.

This week's issues will do little to alleviate longer-term pressure. Large volumes of maturing debt mean the test is likely to come sooner rather than later.