Debt Crisis Destabilises Irish Government, E.U. Scrambles to Prevent Contagion From Spreading

By: Money_Morning

Don Miller writes: Ireland's debt crisis has destabilized its government and is fueling speculation that the $118 billion (85 billion euros) bailout may not be enough to keep it from spreading to other Eurozone countries including Portugal, Spain and Italy.

Nervous financial markets yesterday (Tuesday) continued to suggest global investors lack confidence that some governments will be able to manage their debt and cast doubt on the European Union's (EU) ability to contain the crisis.

Marc Ostwald, a senior strategist at Monument Securities, told the London Times the bond markets are comparable to ''hearse chasers'' who would soon ''take Portugal and Spain to task.''

EU leaders tried to calm the markets and issued assuring statements that Ireland's bailout will halt contagion in the euro region, but investors focused on Portugal, which hasn't cut government spending and for years has been mired in sluggish economic growth.

Bond traders continued to target European debt driving interest rates on Portuguese 10-year debt to a 415 basis point premium over German bunds.

If Portugal needs to be rescued, investors may next turn their attention to high budget-deficit Spain, whose gross domestic product (GDP) is almost twice the size of Portugal, Greece and Ireland combined. The Spanish spread with Germany climbed 14 basis points to 223 after the Treasury sold $4.4 billion (3.26 billion euros) of bills.

"What matters is that there are likely to be a whole host of speculative trading actions taken against Portugal and Spain now that Ireland's getting its comeuppance," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Make no mistake about it: The contagion is not over yet, and the PIGS remain loose in the barnyard."

The Irish rescue, like the Greek bailout engineered last spring, would likely fund three-years of debt financing, allowing the government to avoid the near-prohibitive borrowing costs being demanded in the markets.

But bailing out Spain, which faces more than $177 billion (150 billion euros) in maturing bonds plus the cost of financing the region's third-biggest budget deficit, could drain the $1.04 trillion (750 billion euros) financial safety net set up by the EU and the International Monetary Fund (IMF) to protect the region after Greece's near default.

After Portugal, "the next question would be Spain and then Italy and then France and then the EU," Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London told Bloomberg News. "Spain is a bit too big to be bailed out, the size of a rescue required would use up all the funds available and then you have Italy with contagion as well," prompting "a situation where the euro itself is put into question," he said.

Portugal won't be the next Ireland because the two countries have very different financial positions, says Van Rompuy.

"Portugal does not need any help, it is in a very different situation to Ireland," Van Rompuy told reporters in Stockholm. "Portugal has not suffered from a housing-market bubble, its financial sector is not oversized and its banks are well capitalized."

"inevitable" that Portugal will seek help, Stuart Thomson, who helps manage $110 billion at Ignis Asset Management in Glasgow told Bloomberg. Royal Bank of Canada Europe Ltd. said it expects Portugal to request aid in the first quarter of 2011 at "the latest."

Portugal's debt amounts to 76% of gross domestic product, compared with 53% in Spain, 66% in Ireland and 116% in Italy last year, according to data compiled by Bloomberg. Spending by the Portuguese government continued to grow in the first 10 months of 2010, Finance Minister Fernando Teixeira dos Santos said on Nov. 17.

The country has pledged to cut its deficit to 7.3% of GDP this year and 4.6% in 2011, compared with last year's 9.3%, the fourth-largest shortfall in the euro region.

As concerns grew over implementation of the Ireland rescue, the crisis morphed into political turmoil Monday, as the country's coalition government began to unravel. In return for the passage of a crucial budget package containing $15 billion in spending cuts, Prime Minister Brian Cowen pledged to call an early election next year.

The announcement came hours after the Green Party said it would pull out of the ruling coalition following the budget vote. The group said Cowen has misled voters in negotiating the bailout.

Cowen said in a press conference he would dissolve parliament early next year but only once the budget and bailout issues have been dealt with.

"There will be a time for political accountability for the electorate," he said. But first it is "imperative for this country that the budget is passed. Any delay would in fact weaken our country's position," he added.

Source : http://moneymorning.com/2010/11/24/debt-crisis-rattles-irish-government-...

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