Markets give Irish bailout thumbs down

By Pan Pylas

Associated Press

Published: Monday, Nov. 29 2010 9:58 a.m. MST

LONDON — The euro slid to a new two-month low against the dollar and stocks tumbled Monday, as investors continued to worry that Europe's debt crisis was spreading despite the €67.5 billion ($88.4 billion) bailout of Ireland.

The euro was down 1.4 percent at $1.31 after earlier hitting $1.3065, its lowest level since September 20. Investors concluded that Sunday's bailout of Ireland by the European Union and the International Monetary Fund has done little to stop Europe's debt crisis from moving swiftly onto another country.

Although Portugal is widely considered to be the most at risk for outside help given the size of its debts relative to its economy, the big worry in the market is a possible bailout for Spain.

Most analysts think European authorities can handle bailing out the relative minnows of Greece, Ireland and Portugal but that Spain — at around 10 percent of the eurozone economy — would be another matter altogether.

The yield on Spanish 10-year bonds shot up 0.24 percentage point at 5.42 percent Monday and Portugal's rose 0.05 higher at 7.04 percent. The increases are a measure of investors' waning desire to purchase Spanish and Portuguese bonds, meaning those countries will pay more to borrow in the money markets.

"Investors cannot yet see the end game to these debt stresses, as they move in herds from one country to another," said Jan Randolph, head of sovereign risk at IHS Global Insight.

All this is a far cry from what was intended — the hope among EU policymakers at Sunday's emergency meeting in Brussels was that the latest rescue would help contain the crisis. The measures aimed to help Ireland pay for its banking crisis and reassure markets that Europe was getting a handle on its debt problems following months of prevarication and confusion.

As well as providing instant money to shore up the capital position of Ireland's banks and providing the country funds for day-to-day needs, the EU sketched out new rules for future emergencies to restore faith in the 16-nation euro currency. Greece, meanwhile, was also told it has another four and a half years to repay its €110 billion bailout.

"The bottom line is that the financial markets are unimpressed and that's the most generous description," said Neil MacKinnon, global macro strategist at VTB Capital. "The crisis rumbles on."

Unsurprisingly, ongoing talk of crisis hit stocks hard.

In Europe, the FTSE 100 index of leading British shares closed down 117.75 points, or 2.1 percent, at 5,550.95, while Germany's DAX fell 151.01 points, or 2.2 percent, to 6,697.97. The CAC-40 index in France ended 91.69 points, or 2.5 percent, lower at 3,636.96.

In the U.S., the Dow Jones industrial average was down 127.68 points, or 1.2 percent, at 10,964.32 around midday New York time, while the broader Standard & Poor's 500 index fell 11.20 points, or 0.9 percent, to 1,178.20.

Investors also have a number of key economic releases to digest this week, not least Friday's closely watched U.S. nonfarm payrolls report for November. Before then, the monthly surveys into the U.S. manufacturing and services sectors from the Institute for Supply Management have the potential to move markets.

In addition, there are interest rate decisions from the European Central Bank and the Bank of England on Thursday. Neither is expected to change borrowing costs, but investors will be particularly interested in what ECB President Jean-Claude Trichet says Thursday about Europe's continuing debt problems.

Earlier Monday in Asia, Japan's Nikkei 225 stock average added 0.9 percent to close at 10,125.99, buoyed by a stronger dollar, as the yen retained a fairly soft tone against the dollar to the relief of the country's major exporters.

By late-afternoon London time, the dollar was up another 0.4 percent at 84.35 yen.

South Korea's Kospi fell 0.3 percent to 1,895.54 amid ongoing tensions between the country and North Korea following last week's exchange of artillery.

Australia's S&P/ASX200 index rose 0.4 percent, to 4,618.5, and Hong Kong's Hang Seng index climbed 1.3 percent to 23,166.22.

Chinese shares were mixed as cautious investors watched for fresh moves to tighten monetary policy and counter inflation. The benchmark Shanghai Composite Index gave up 0.2 percent to 2,866.36. The Shenzhen Composite Index of China's smaller, second exchange gained 0.5 percent to 1,339.31.

Benchmark oil for January delivery was up 87 cents to $84.63 a barrel in electronic trading on the New York Mercantile Exchange.

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Associated Press writer Pamela Sampson in Bangkok contributed to this report.

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