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Will the euro band-aids stick this time?
11/29/2010 10:31 am EST
Will the latest round succeed in convincing financial markets that the bleeding in the euro has stopped when earlier applications have failed? The results this morning are mixed.
The extent of this round is impressive.
First, of course, there’s the $113 billion bailout of Ireland by the European Union and the International Monetary Fund. The deal, struck Sunday night, will provide about $65 billion to bolster the finances of Ireland’s government and $13 billion to recapitalize Ireland’s banks. The remainder will go into a contingency fund that Dublin can draw down over the next seven and a half years to support the country’s banks. The Irish will pay a heavy price for this “rescue”: more cuts in government spending, a “contribution” (or “raid,” depending on your point of view) by the National Pension Reserve Fund, Ireland’s sovereign wealth fund, to the bank contingency fund, and an interest rate that averages about 6% on the package.
Second, Euro Zone leaders agreed on the outlines for a permanent financial backstop mechanism (no one wants to call it a bailout fund) to replace the current temporary $600 billion bailout fund.
Third, in a separate, but to my mind coordinated, action, the Spanish government hosted a weekend conference with the country’s biggest businesses to demonstrate Spain’s commitment to reform of its labor markets and its devotion to increasing the competitiveness of Spain’s economy.
Fourth, the Portuguese government scheduled a similar meeting this week to highlight that country’s commitment to increasing the competitiveness of the Portuguese economy.
Reviews from Asian markets were mixed but positive (especially considering the continued tensions in Korea.) Tokyo’s Nikkei closed up 0.86% and Hong Kong’s Hang Seng climbed 1.26%. Korean markets fell a tiny 0.3% and Shanghai fell 0.2%.
European markets were much less impressed. At 9:00 a.m. New York time Monday morning the euro was down against all the 16 currencies of its major trading partners. The yield on Spain’s 10-year government bond increased by 0.17 percentage points and the yield on Portugal’s 10-year bond climbed by 0.07 percentage points. In the derivatives market the cost of insuring against default by Spain or Portugal climbed to a new record.
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