Markets fall and bond yields continue to rise
Cowen resists snap election call ahead of budget
UK confirms intention to offer £7bn in loans
MARKET turmoil failed to subside yesterday in spite of the announcement of a multi-billion euro Irish bailout.
As the Irish governing coalition threatened to fall apart and independent MPs said they would vote against the emergency budget needed to secure the aid, investors fled stocks and the yields on peripheral Eurozone sovereign debt rose.
Despite initially rallying, the Eurostoxx 50 fell two per cent to close at 2,811 yesterday, while the Irish ISEQ?20 index dropped 1.9 per cent to close at 445 and the FTSE 100 closed down 1.7 per cent at 5,683.
The yield on European government bonds rose, reflecting that most buyers were not reassured by Ireland’s application for cash. Irish 10-year gilt yields rose to 8.1 per cent, Spanish 10-year gilt yields closed up at 4.74 per cent and Portuguese 10-year yields closed down at 6.72 per cent having risen from a low of 6.7 per cent.
The cost of insuring Eurozone debt also jumped in response to renewed uncertainty about Ireland’s fate. Five-year credit default swaps (CDS) rose 25 basis points to 530bps (a cost of €530,000 or £453,000, to insure €10m of debt) and Portuguese five-year CDS rose 40bps to 460bps. Traders also dumped the euro, with the single currency falling against sterling from 86p to 85p and against the greenback from $1.38 to $1.36.
Market fears were driven by the bailout’s political fallout, which threatened to spiral out of control yesterday.
Rebel independent MPs said they may withdraw support for Ireland’s austerity budget – a necessary precondition of the European bailout.
With the governing coalition having a majority of just three and upcoming by-elections liable to wipe out even this advantage, the defection of several independents could threaten its ability to pass the controversial emergency budget due in early December.
Failure to pass the budget for 2011, which is to make €6bn worth of cuts, would hasten the likely inevitable demise of embattled Prime Minister Brian Cowen.
And in a further blow, coalition partner the Green Party dramatically announced it will walk away from the partnership, calling for a general election in January to oust the PM.
The Greens say they will still back the austerity measures but even this will not guarantee their success if the government loses the impending by-elections.
Analysts believe a complete collapse of the rescue package is unlikely, however, as opposition Labour and Fine Gael MPs are also desperate to see the deal go through and would almost certainly allow the austerity bill to be passed. In a worst-case scenario, in which the bill is rejected and the government collapses, it is understood Europe will allow time for a new government to be formed rather than completely withdrawing the bailout package.
Last night, Cowen vowed to soldier on until the bill is passed but said he would then call an election. He said: “It has always been my intention to ensure we get the job done... It is my intention at the conclusion of this budgetary process... to seek the dissolution of [parliament] to enable the people to determine who should undertake the responsibilities of government.”
The developments have left Portugal looking particularly exposed, with bears fearing it could be the next Eurozone domino to fall.
Prime Minister Jose Socrates was defiant, claiming: “The country does not need any help,” but markets reacted negatively, raising the cost of insuring its debt by 40 basis points.
Greece was also hit hard, with credit default swaps on Greek government debt rising to over 1,000 basis points, meaning bond-holders will have to pay more than €1m to insure €10m of its debt for five years.
Chancellor George Osborne confirmed yesterday the UK would commit around £7bn to the Irish rescue.