Euro nears 7-week low on debt concerns

The euro was trading near a seven-week low amid concern a failure to craft a rescue package for Ireland will allow the nation…

The euro was trading near a seven-week low amid concern a failure to craft a rescue package for Ireland will allow the nation's banking crisis to spread to other member states of the common currency.

Despite concerns over a potential bailout, Irish bonds remained largely flat this afternoon. At 12.07pm, yields on 10-year Government bonds were 8.270per cent, up 0.28 per cent from today's opening level. The spread to the German bund was 567 basis points.

Minister for Finance Brian Lenihan said talks with the European Commission, the European Central Bank and the International Monetary Fund on potential aid for the country's banks will start tomorrow.

"Concerns about the region's debt crisis weigh on the euro," said Jeremy Stretch, executive director of foreign- exchange strategy at Canadian Imperial Bank of Commerce in London. "That's given the dollar a boost, and the euro stays under pressure. Ireland's problem is not so much a sovereign issue as a banking issue."

The euro was at $1.3494 as of 11.27am in London from $1.3489 in New York yesterday, when it touched $1.3448, the weakest level since September 28th. The shared currency traded at 112.56 yen from 112.38 yen after dropping 0.4 per cent yesterday.

Shares in Irish banks were mixed, with Irish Life & Permanent rising 2.6 per cent to 84 cent, while Bank of Ireland fell 0.8 per cent to 38.8 cent and AIB declined 8.4 per cent to 36 cent on the Dublin market this afternoon.

Meanwhile LCH Clearnet doubled the extra margin requirement it charges for Irish bond trading to 30 per cent of net positions. The increase will be based on outstanding positions at the close of business tomorrow and reflected in a so-called margin call on November 19th, LCH Clearnet said in a statement on its website today.

The change applies to Irish government bond repurchase agreements cleared through its RepoClear service, it said.

Clearing houses such as LCH guarantee investors' trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

LCH boosted the margin requirement after the yield on Irish 10-year government bonds stayed "consistently" at more than 500 basis points above a AAA benchmark, it said.

"We are not making any judgment on Irish creditworthiness, this decision is based solely on government bond-spread data," John Burke, head of fixed income at LCH, said today in an interview. There is no limit to potential extra margin charge, and while the company will continue to monitor the market, there are no current plans to increase it further, he said.

Credit-default swaps on Ireland climbed 18 basis points to 537.5, according to data provider CMA. Contracts on Greece increased 10 basis points to 938, Portugal rose 7 to 429, Italy was 3 higher at 188.75 and Spain was up 4.5 at 261.5.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments was unchanged at 168.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Bloomberg