The euro has hit a seven-week low against the dollar and global stock markets retreated today on fears that the Republic’s debt crisis may spread to other European countries with large budget deficits.
Investors fear that Portugal and Spain may also have to seek financial help. The Spanish government faced a sharp rise in the cost of its short-term borrowings at an auction today while the yield on longer-term bonds also rose.
Spanish 10-year bonds dropped a sixth day, with the yield 16 basis points higher at 4.91 percent. The yield spread to benchmark German 10-year bonds widened to a euro-era record. Portugal's 10-year yield rose 21 basis points to 7.02 per cent.
Portuguese securities also slid.
Germany's Finance Minister Wolfgang Schaeuble also reasserted that the future of the euro was at stake if the crisis could not be contained while German Chancellor Angela Merkel said her nation "won't let up" in seeking investor involvement in a crisis-resolution mechanism for the euro area from 2013.
Irish borrowing costs continued to rise today with the yield on ten-year bonds hitting 8.4 per cent, while the spread to the bund widened to 588 basis points from 5.88 per cent. Borrowing costs, which fell yesterday morning after the bailout was announced, have been rising since the Green Party called for the Taoiseach Brian Cowen to set, by the end of January, a date for a general election.
The cost of insuring Irish debt rose for a third day, climbing 29 basis points to 555, according to data provider CMA. Spanish Auction Equities fell, pushing the Stoxx Europe 600 Index down 0.9 percent.
Irish bank shares remained under pressure today with Bank of Ireland down 18 per cent at 35 cent, AIB off 14 per cent at 35 cent and IL&P down 7 per cent at 78 cent.
Global shares were also lower today with the Dow Jones index in the US falling 1.4 per cent in early trading, while European markets suffered similar losses this afternoon. Asian shares had earlier ended sharply lower.
"The Irish rescue package was a band-aid solution, and it doesn't hide the fact that the goalposts are in the midst of being shifted," said Sean Maloney, an interest-rate analyst at Nomura International in London. "There's a repricing lower in most of these bonds."
"The markets currently have virtually zero confidence that the bailout in Ireland will solve the European crisis," Charles Diebel and David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, wrote in a note today.
"With markets effectively in a position to dictate policy, the risk is that the credibility crisis shifts to more sizeable EU countries and thereby poses a greater risk to the system as a whole."
Reuters/Bloomberg