Bailout fails to bring calm to markets

THE announcement of an international bailout for Ireland failed to enforce calm on the markets yesterday as political turmoil and ongoing insolvency issues stoked fears.

After initially gaining, the Eurostoxx 50 fell two per cent to close at 2,811, tracing a pattern seen also on the FTSE 100, which closed down 1.7 per cent at 5,683 and the Dax, which fell one per cent to close at 6,830.

The Irish ISEQ?20 index dropped 1.9 per cent to close at 445 while the Portuguese PSI 20 fell two per cent to 7,801.

The yield on European government bonds also reversed their direction after the news that the Irish coalition government could break up.

After initially falling, Irish 10-year gilt yields rose to 8.1 per cent while Portuguese 10-year yields closed down at 6.72 per cent but up slightly from the day’s low of 6.7 per cent. Spanish 10-year gilt yields closed up at 4.74 per cent.

The cost of insuring peripheral Eurozone government debt, meanwhile, rose on the back of political developments. Five-year credit default swaps (CDS) rose 25 basis points to 530bps – that is, €530,000 (£453,000) to insure €10m of debt. Greek five-year CDS spreads grew by 37bps to 1000bps and Portuguese five-year CDS rose 40bps to 460bps.

The euro also opened up initially but fell later in the day. Sterling-euro dropped from 86p to 85p while euro-dollar fell from $1.38 to $1.36.

The movements reflect ongoing fears not only that the Irish government could encounter political trouble as it attempts to pass the cuts necessary to secure bailout funding, but also that the Eurozone crisis is far from over.

Even if Ireland passes its budget, it will still need to solve the underlying insolvency of its banking system in order to restore economic health.