Euro down as EU seals bailout fund deal

The euro has slipped and Portuguese bond yields widened today after European leaders agreed a new package of anti-crisis measures but delayed their contributions to the sovereign debt bailout fund.

Eurozone leaders had pledged to use a two-day summit to unveil a comprehensive solution at the March 24-25 summit that would reassure jittery markets but they admitted Portugal’s government collapse had pushed new threats to the fore.

But the abrupt resignation of Portuguese Prime Minister Jose Socrates on the eve of the meeting, after his austerity measures were rejected by parliament, cast a long shadow.

"The euro has survived a critical test but there is lots of homework to be done," German Chancellor Angela Merkel told reporters, saying the bloc needed to "atone for past sins".

"This is a comprehensive package which I think is a big step forward. Whether it will be sufficient, only time will tell."

The new deal secures new funds for the European Stability Mechanism (ESM), the region’s permanent safety net that will be operational from mid-2013.

But Germany had backtracked before the summit on a commitment to supply €11bn for the fund in its first year, leading to a compromise in which capital injections totalling €80bn for all eurozone members will be spread out over five years rather than three, with smaller instalments.

Traders said the single currency fell back against the pound and dollar on the news, though both the US and UK currencies also performed poorly amid widespread selling.

The euro is trading at about 1.1388 against the pound and 0.7101 against the dollar.

CMC Markets analyst Michael Hewson attributed the fall to “prevarication by European leaders who…postponed discussions about an increase to the EFSF until June, and no progress has been made on the questions of Ireland’s banks and bailout terms.”

Yields on Portugal’s ten-year benchmark bonds pushed above eight per cent to a new record while two-year bond yields hit seven per cent, both rates viewed as unsustainable for a country which needs to refinance about €4.5bn of debt in April and a similar amount in June.

“Portugal continues to be a concern,” Hewson said.