The Irish are showing grit but time is running out

Dublin has repeatedly unveiled commendably bold measures to fight the financial crisis. First, it offered to guarantee the banks. Then it replaced its top regulator and central bank governor and embarked on an unusually forceful effort to inject transparency into its troubled banks. Its painful austerity plan has been accepted by voters and social cohesion is still high. Yet, investors are still pricing in a high default risk in Irish bonds with yields above 8%.

However, the trading volume of Irish bonds is very thin. The yield jump could be followed by an equally sharp fall in the yields and Dublin has until next summer to refinance its bonds. This gives the Irish government plenty of time to bring yields down. There are some catalysts that would help bring the yields down: passing of the budget plan next month, an audit of the banks' books using an external company.

There are some risks to the Irish's plan of lowering their bond yields. One is the sheer size of the fiscal hole, which could worsen with the austerity plan. Another is the uncompromising German stance towards bail-outs and credit haircuts. The fact that Ireland revealing news on their banks' losses would sap confidence as well.

However, there are other options available for Ireland to lower its bond yields. Ireland's sovereign wealth fund could start purchasing its own bonds to lower yields.

The problem now is that the euro zone leaders are not displaying any cohesion or levelheadedness. This results in investors shorting Irish debt.