Irish backlash hits Spain, EU warns of blow to growth

Padang bailout for Ireland and new rules on bonds investors cracked a backlash at Spain on Monday, pushing up interest rates as the EU warned that the eurozone debt crisis could crimp growth.

With the Irish public aghast at the rescue terms, described in The Irish Times as "the longest ransom note in history," and the European Union expressing "concern" at financial turmoil, markets turned again on Spain.

The senior strategist at BGC partners in London, Howard Wheeldon, said that the EU could help Portugal without difficulty.

"But when and if it comes to a debt market implosion in Spain, EU ministers would find that they have a situation on their hands that may well be beyond their ability to resolve by agreement."

He commented: "Are we witnessing the early stages of a breakdown of the euro and indeed, possibly the European Union as well?"

A senior partner of Goldman Sachs investment also said the strains of trying to run a monetary union without a fiscal union would likely eventually force a breakup of the single currency -- or ultimately lead to much tighter budget rules for all EU members.

"We won't get an answer for many years and we will waver between them both but you will get greater evidence of (fiscal union)," Jim O'Neill, head of Goldman Sachs Asset Management, was quoted as saying in The Sunday Telegraph.

Spain says it is a totally different case from the two eurozone countries rescued so far, Greece and Ireland, and will not need a rescue.

The EU and IMF completed a rescue worth 85 billion euros (113 billion dollars) for Ireland on Sunday and also tried to douse uncertainty that has taken the eurozone debt crisis to ever higher levels in recent weeks.

New rules enabling governments to change the terms of borrowing agreements to ensure that investors take a "haircut" -- market slang for not getting back all of their investment -- would not take effect until after 2013 when current emergency funding expires.

But this, together with the Irish rescue, was seen by fund managers as posing as many new questions as it answered.

At Barclays Bourse in Paris, Franklin Pichard commented that "investors are waiting for a reply from Europe concerning the resolution of country systemic risk."

He said: "For the moment, the lack of precision about the setting up (of a new rescue fund after 2013) ... is not calming concerns completely."

The new system would be activated case by case if a eurozone country got into financial difficulty and the country concerned would negotiate new terms for repayments of its debt with private holders of its bonds.

Pichard said the market would not wait until 2013 and wanted immediate clarification.

Analysts at Goldman Sachs said that the announcements on Sunday marked an attempt to tackle the effects of the crisis but investors would remain focused on Portugal and Spain.

The rate Spain must pay to borrow for 10 years jumped to a record high of just under 5.46 percent at one stage, from 5.148 percent, and the difference over what eurozone benchmark Germany pays for 10 years widened again to near record levels of 2.70 percent, the biggest gap since 2002.

The yields on 10-year Portuguese bonds fluctuated around 7.0 percent, up from 6.690 percent on Friday.

Investors also pushed up the yield on Irish bonds back above 9.0 percent on Monday evening, from 8.877 percent late on Friday, indicating a lack of confidence in Dublin's ability to implement its austerity plans as well as uncertainly surrounding elements of the rescue package.

Analysts and savings fund managers took a closer look at public finances in Italy and backed away, sending its 10-year bond yield up sharply to 4.61 percent, the highest since June 2009.

The 10-year rate for Greece, rescued in May and which was granted an extension to 2021 to repay its bailout loans, was the only one to see its yields drop, down 0.02 percentage points to 11.596 percent.

In an auction Monday investors pushed up the yield on 10-year Belgian bonds to 3.72 percent from 3.26 in the previous auction on October 25.

The euro fell to 1.3064 dollars its lowest point since September 21, while the main European stock markets posted sharp falls of over two percentage points.

The European Commission warned Monday that the turmoil over eurozone debt is now a threat to growth, which will slow next year to 1.5 percent from 1.7 percent this year.

"The financial-market situation remains a concern, with further tensions possible, as highlighted by the reappearance of stress in sovereign-bond markets lately," the Commission said in new economic forecasts for 2010-2012.

In Ireland, people woke to a new era of humiliation and a terrible hangover from a decade of bank-driven bingeing on property.

The Irish Sun newspaper summed up the general mood: The rescue, it said, "sentences us all to generations of horrific debt."

It said: "It is pure fantasy to think the Irish people can afford to pay this bill. The taxpayer is being saddled with all the pain, while the bondholders get off scot free."

ING analysts noted that pressure from Germany for private investors to share the cost of future bailouts had been "watered down over the weekend."

Analysts at ING and at Goldman Sachs bank noted that the terms of the Irish rescue did not require people who had financed existing debt to take a "haircut".

Goldman Sachs analysts warned: "The ECB faces a serious dilemma on Thursday because they have indicated that they'll spell out their next strategy on that occasion."

They said: "The ECB has already purchased around 17 percent of the combined debt stock of Greece, Ireland and Portugal. The share of public debt of the former two in public sector hands will likely exceed 50 percent by mid-2013."


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