Stock markets and euro fall amid continued unease

CONTAGION FEARS:EXPECTATIONS THAT Sunday's announcement regarding Ireland's application for IMF-EU aid would calm markets were thwarted yesterday as global stock markets and the euro fell by close of business.

As the world awoke to the news that Ireland had requested outside financial aid, markets climbed in response.

However, the early gains were reversed in afternoon trading due to a combination of uneasiness about Ireland’s unfolding political drama and concern that the bailout would fail to stem the spread of the European debt crisis.

David Buik, a market strategist at London-based BGC Partners, said the “piecemeal, drip-drip syndrome” offered by Ireland was the worst possible tonic to offer a market, as “no one knows where they stand”. The “indecisive leadership over Ireland’s bailout” compounded the issue, he said.

Other analysts said the markets should rally during the week as further details of Ireland’s financial aid plan and its four-year budgetary plan emerge in coming days.

While Ireland’s political woes dampened the market, of more concern was the possibility that the euro zone’s second financial bailout would not halt the contagion effect, with attention increasingly turning to Portugal.

Bond markets held up relatively well, although yields on Irish 10-year government bonds did rise from lows of 8.06 yesterday to close at 8.31. While Ireland will most likely remain outside the bond market for the next three years, the performance of the Irish bonds is indicative of market appetite for the debt of other euro zone countries.

Portuguese bonds advanced despite being the main focus of investor concern. Credit default swaps linked to Portuguese debt jumped 40.7 basis points to 457.5.

Equity markets across the globe fell yesterday, with heavy selling in bank stocks. This was particularly the case in Ireland, as focus turned to the funding problems of the Irish banking sector, and the repeated indications from authorities that a restructuring of the Irish banks was imminent. AIB lost 6.2 per cent to 41 cent and Bank of Ireland fell 19 per cent to 39 cent, while Irish Life & Permanent shed 27 per cent to 84 cent.

The bonds of the Irish banks – the debt they issue to fund themselves – were also hit. AIB’s 12.5 per cent subordinated debt due in 2019 fell to 42 cent in the euro, while Bank of Ireland’s 10 per cent debt, due in 2020, dropped to 60.6 cent in the euro.

The recent sell-off in Irish bank debt is due to concerns that holders of that debt may have to take a “haircut” in the event of any further restructuring, an issue that was highlighted yesterday when a group of Anglo Irish Bank subordinated bondholders agreed to take an 80 per cent writedown on the value of their holdings.

Meanwhile, having hit a one-week high against the dollar overnight on the back of the news that the EU and and IMF had agreed to the Irish financial aid plan, the single currency finished 0.8 per cent lower on the day at $1.36.