Ireland Bailout Provides Little by Way of Relief for Markets: Euro Credit
Germany's chancellor Angela Merkel
Jochen Eckel/Bloomberg
European governments sought to stem market losses yesterday by agreeing to the aid package for Ireland and also by endorsing steps on post-2013 rescues that scale back calls by German Chancellor Angela Merkel for bondholders to take losses and share the costs with taxpayers.
European governments sought to stem market losses yesterday by agreeing to the aid package for Ireland and also by endorsing steps on post-2013 rescues that scale back calls by German Chancellor Angela Merkel for bondholders to take losses and share the costs with taxpayers. Photographer: Jochen Eckel/Bloomberg
Nov. 29 (Bloomberg) -- Julian Callow, chief European economist at Barclays Capital, talks about the 85 billion-euro ($113 billion) aid package given to Ireland in an attempt to quell market turmoil menacing the euro. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
The 85 billion-euro ($113 billion) bailout of Ireland failed to stabilize sovereign credit markets as bond yields in the euro region’s most-indebted countries rose to records.
European governments sought to stem market losses by agreeing to the aid package for Ireland and also by endorsing steps on post-2013 rescues that scale back calls by German Chancellor Angela Merkel for bondholders to take losses and share the costs with taxpayers.
“It is always about confidence and this should be enough to restore a degree of confidence in Ireland and in particular Irish sovereign debt,” Charles Diebel, head of market strategy at London-based Lloyds TSB Corporate Bank, wrote late yesterday in a note to clients. “It doesn’t, however, address the underlying issues of monetary union without fiscal union and thereby Portugal-Spain risks remain.”
The 10-year Spanish bond yield jumped 26 basis points to 5.48 percent, the highest since 2002. The difference in yield, or spread, over German bunds of similar maturity touched a euro- era record of 273 basis points. The yield on equivalent Irish bonds increased 12 basis points to 9.47 percent. The euro weakened as much as 1.3 percent to $1.3064, the lowest in more than two months.
The cost of insuring against default on Portuguese and Spanish debt climbed to record levels, according CMA data.
Spain and Portugal
“The real issue for the euro is that the tension around Ireland has seen broad-based contagion effects, including to Portugal and Spain,” Jens Nordvig, a New York-based managing director of currency research at Nomura Holdings Inc., wrote today in a note to clients.
Market speculation intensified last week that Portugal and perhaps even Spain will require external support after Ireland. A bailout of Portugal would cost about 50 billion euros, which is “well within the capacity” of funds made available by the European Union and the International Monetary Fund, Nordvig said.
“The additional resources needed to fund Spain in a scenario where Spain lost market access would test the limits of the capacity available from the EU-IMF,” or about 385 billion euros, he said. “This is the reason Spain is pivotal to the outlook for the euro.”
Credit markets were tested today by a 6.8 billion-euro sovereign bond auction in Italy. Borrowing costs rose after the sale with the yield of 10-year Italian debt climbing 21 basis points to 4.64 percent. Portugal, Belgium, Germany, Spain and France also plan to sell securities this week.
‘Under Pressure’
“Volatility is going to persist and I wouldn’t rule out a further widening of spreads in the near term,” said Nicholas Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for money managers. “The euro system as a whole is under pressure and there’s huge political pressure on its members to hold the region together.”
Spanish Economy Minister Elena Salgado said yesterday her country won’t need aid. She said steps taken by European finance ministers will help control speculation in the financial markets. The Spanish economy is the fourth largest in the euro zone and is almost twice the combined size of Portugal, Ireland and Greece.
As part of yesterday’s talks with EU officials, Greece was given an extra four-and-a-half years to repay emergency loans totaling 110 billion euros to match the seven-year term of Ireland’s deal. Greek bonds rose, sending the yield down 5 basis points to 11.72 percent.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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