German Chancellor Angela Merkel said the prospect of serial European bailouts was “exceptionally serious,” sending the euro to a three-month low as officials estimated saving Ireland will cost 85 billion euros ($114 billion).
Irish bonds dropped and the premium that investors demand to hold Spanish debt over German counterparts jumped to a euro-era record as the relief rallies triggered by Ireland’s Nov. 21 aid request evaporated. Traders are now betting the turmoil that started in Greece a year ago will spread to Portugal and Spain.
“The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis,” Charles Diebel and David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, said in a note today. “With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable European Union countries and thereby poses a greater risk to the system as a whole.”
Contagion is spreading through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to save its banking system. The European Commission estimates Ireland may need 85 billion euros, according to two officials who were on a Nov. 21 conference call of finance ministers. Of the total, 35 billion euros would go to banks and 50 billion euros to help finance the government.
The euro dropped 1.8 percent to $1.338 as of 4:55 p.m. in London. The yield on Ireland’s 10-year bond rose 35 basis points to 8.65 percent. The spread on Spanish 10-year bonds over bunds rose 28 basis points to 236 basis points.
Merkel today chose to highlight the risks facing the euro even as bailout talks destabilize Ireland’s government. Speaking in Berlin, she said while she didn’t want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe. The German leader is stressing the threat to the euro posed by indebted member countries and is pushing German plans to make investors help pay for any future crisis in the currency area.
“I won’t let up on this because otherwise that primacy of politics over finance can’t be enforced,” Merkel said. “It remains our task to keep calling for tough measures and tough conditions, but also to express clear support for the euro.”
Merkel’s stance has drawn opposition from European Central Bank President Jean-Claude Trichet and leaders in Spain and Greece, who say it risks derailing euro-area nations’ deficit- cutting efforts.
“It’s a thin line she has to walk between keeping control of the discussion with the other governments to get the crisis resolution mechanism, while not stirring further uncertainty, speculation and contagion in the markets,” said Carsten Brzeski, an economist at ING Group in Brussels. “Markets are following her very closely. Her fate is linked to this crisis resolution mechanism right now. It has to be a success.”
The extra yield on Portuguese 10-year bonds today rose 28 basis points to 435 basis points. IMF Deputy Managing Director John Lipsky stressed in an interview with Bloomberg Television that “facilities exist” for Portugal should they be needed, though the country has not asked for assistance.
Ireland’s government will tomorrow announce welfare cuts amounting to 800 million euros in 2011 as part of its four-year plan to reduce its budget deficit to 3 percent of gross domestic product from 12 percent, a personal familiar with the matter said today. The county’s 12.5 percent corporate tax rate will remain a pillar for national policy and the minimum wage will be lopped by 12 percent, the person said.
Unless European officials act quickly enough to calm the crisis, Ireland risks a “major bank run,” Pacific Investment Management Co. Co-Chief Investment Officer Mohamed A. El-Erian said today. Allied Irish Banks Plc, the country’s second-largest bank, said Nov. 19 that its deposits dropped by about 13 billion euros -- or 17 percent -- since the start of the year.
“The numbers so far have shown that the Irish banking system has been bleeding deposits,” El-Erian said in a Bloomberg Radio interview on “Bloomberg Surveillance” with Tom Keene. “It will seriously undermine the prosperity of this country for a generation.”
Cowen, who yesterday said fresh elections will be called once bailout talks are completed, today faced calls to resign from his own Fianna Fail party as lawmakers prepare to meet in Dublin tonight.
“I’ll be telling him that I’ve lost confidence in you, the public has lost confidence in you and for the sake of the country and the party, give us an indication when you will resign and let us select somebody to lead us into the next election,” Noel O’Flynn, a lawmaker in the ruling party, told Bloomberg News in Dublin today. “Several members will stand up and ask him to go after the budget” on Dec. 7.