LONDON: A bailout for Ireland agreed by European Union finance ministers on Sunday, Nov 28 may spark a short- term relief rally in Irish debt and the euro but will not remove the risk of the crisis spreading along the euro zone periphery.
Analysts said the 85 billion euro rescue package for Ireland and the approval of broad outlines of a permanent crisis- resolution mechanism were unlikely to reduce pressure on yields on government debt issued by Portugal and Spain, seen as the next weakest links after Ireland among the 16-member euro zone.
"It hasn't really resolved anything. If anything, it has just confirmed that the crisis is deepening," said Lena Komileva, head of G7 economics at Tullett Prebon in London.
"The EU policy is just catching up with the reality of a deepening market crisis."
The premium investors demand to hold peripheral euro zone government debt rather than German benchmarks has been close to euro-lifteime highs in recent days on concern the crisis could engulf other highly-indebted euro zone states.
Komileva said the terms of the bailout would reduce Irish borrowing costs and this should see its spreads over Germany narrow.
"Markets are going to react fairly positively in the first instance to the news of the lower cost of borrowing but the risk over solvency will continue to undermine market sentiment," she said.
Lloyds TSB economist Kenneth Broux said Irish spreads should come in, as would those of Portugal and Spain, "but we are not going back to the low levels prior to April or March this year.
Under the crisis resolution mechanism, private bondholders could be made to share the pain of a restructuring of euro zone sovereign debt bought after 2013.
"The level playing for sovereign credit has undergone a change this year. Sovereign credit will be trading not just according to the fact that it is part of the euro."
Instead, investors would have to take into account the different levels of risk attached to each sovereign issuer.
''
LITMUS TEST
However, Broux said short-term debt that did not expire beyond 2013 could prove attractive.
He said a key question for markets would be whether the crisis resolution mechanism would affect the European Central Bank's decision, due on Thursday, on how it will proceed with its exit from extraordinary stimulus measures.
"That for me is going to be the litmus test for the euro this week and maybe for financial institution stocks," he said.
A number of euro zone banks have struggled to raise funds in money markets and have been dependent on ECB funds.
The euro currency has also come under pressure because of the debt crsis. It hit a two-month low against the dollar on Friday but rose in early Asian trade after the Irish bailout was announced.
Chris Huddleston, money market strategist at Investec, said that the single currency could fall once European markets opened as the Irish bailout was largely in line with expectations.
"I don't think by any means does it ring-fence Portugal or Soain," he added.
Analysts said, however, that the euro was likely to be more affected by factors other than the debt crisis as the week wore on -- among them Friday's release of U.S. employment data.
They said the euro's weakness against the dollar had also been driven by buying of the U.S. currency.
The euro was last at $1.3275 against the dollar, having risen as high as $1.3345, compared with levels around $1.32 in late New York trade on Friday. - Reuters
Analysts said the 85 billion euro rescue package for Ireland and the approval of broad outlines of a permanent crisis- resolution mechanism were unlikely to reduce pressure on yields on government debt issued by Portugal and Spain, seen as the next weakest links after Ireland among the 16-member euro zone.
"It hasn't really resolved anything. If anything, it has just confirmed that the crisis is deepening," said Lena Komileva, head of G7 economics at Tullett Prebon in London.
"The EU policy is just catching up with the reality of a deepening market crisis."
The premium investors demand to hold peripheral euro zone government debt rather than German benchmarks has been close to euro-lifteime highs in recent days on concern the crisis could engulf other highly-indebted euro zone states.
Komileva said the terms of the bailout would reduce Irish borrowing costs and this should see its spreads over Germany
"Markets are going to react fairly positively in the first instance to the news of the lower cost of borrowing but the risk over solvency will continue to undermine market sentiment," she said.
Lloyds TSB economist Kenneth Broux said Irish spreads should come in, as would those of Portugal and Spain, "but we are not going back to the low levels prior to April or March this year.
Under the crisis resolution mechanism, private bondholders could be made to share the pain of a restructuring of euro zone sovereign debt bought after 2013.
"The level playing for sovereign credit has undergone a change this year. Sovereign credit will be trading not just according to the fact that it is part of the euro."
Instead, investors would have to take into account the different levels of risk attached to each sovereign issuer.
''
LITMUS TEST
However, Broux said short-term debt that did not expire beyond 2013 could prove attractive.
He said a key question for markets would be whether the crisis resolution mechanism would affect the European Central Bank's decision, due on Thursday, on how it will proceed with its exit from extraordinary stimulus measures.
"That for me is going to be the litmus test for the euro this week and maybe for financial institution stocks," he said.
A number of euro zone banks have struggled to raise funds in money markets and have been dependent on ECB funds.
The euro currency
Chris Huddleston, money market strategist at Investec, said that the single currency could fall once European markets opened as the Irish bailout was largely in line with expectations.
"I don't think by any means does it ring-fence Portugal or Soain," he added.
Analysts said, however, that the euro was likely to be more affected by factors other than the debt crisis as the week wore on -- among them Friday's release of U.S. employment data.
They said the euro's weakness against the dollar had also been driven by buying of the U.S. currency.
The euro was last at $1.3275 against the dollar, having risen as high as $1.3345, compared with levels around $1.32 in late New York trade on Friday. - Reuters
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