Irish bailout request boosts euro

Click to follow
The Independent Online

Ireland's application for a massive emergency loan has helped stocks and the euro currency get off to a solid start to the week as investors breathed a sigh of relief that some sort of aid package is being cobbled together.

In Europe, the FTSE 100 index of leading British shares was up 25.42 points, or 0.4 per cent, higher at 5,758.25 while Germany's DAX rose 37.95 points, or 0.6 percent, to 6,881.50. The CAC-40 in France was 22.12 points, or 0.6 per cent, higher at 3,882.28.

Wall Street was poised for a solid advance at the open later — Dow futures were up 36 points at 11,215 while the broader Standard & Poor's 500 futures rose 5.1 points to 1,203.30.

Sentiment in the markets has been buoyed by yesterday's confirmation that the Irish government is formally requesting a financial aid package to shore up the country's debt-laden banking sector — investors hate nothing more than uncertainty and prevarication.

European Union finance ministers quickly agreed in principle to the bailout, saying it "is warranted to safeguard financial stability in the EU and euro area." All sides said that further negotiations loomed.

The actual details of the package, which is expected to be not far short of €100 billion are not expected for a few days yet as Irish officials sit down with counterparts from both the European Union and the International Monetary Fund. The country will likely be forced to make further massive spending cuts and raise its very low rate of corporation tax.

"A request for aid is different from delivery, so there may be some early uneasiness in the market early in the week if there is some intensification in the rhetoric surrounding the terms and conditions of the bailout," said Daragh Maher, an analyst at Credit Agricole.

For now though, there is a sense of relief that some sort of resolution is now in the offing, in light of the foot-dragging that marked the bailout of Greece earlier this year.

That is particularly evident in the performance of the euro, which is trading 0.2 per cent higher at $1.3738.

Since the scale of Ireland's debts became the markets' No. 1 point of interest, the euro has flagged, dropping from a multi-month high of $1.4281 on November 4 to as low as $1.3447 last Tuesday.

Many analysts think the respite will prove to be short-lived especially if another highly-indebted euro country — most tip Portugal — starts getting the unwelcome attention of bond investors.

"The only real question being how quickly the 'hearse chasing' fraternity take Portugal and Spain to task, given that the leaders of the euro zone have once again failed to act pre-emptively, but rather only when the clock is set at 1 minute to midnight," said Marc Ostwald, a markets strategist at Monument Securities.

Even if there are no more bailouts, the scale of austerity being pursued in a number of countries in the euro zone will highlight the divisions between the single currency bloc.

While Ireland and Greece, and possibly others, face years of retrenchment, the euro zone's number one economy Germany will likely continue to prosper on the back of its exporting prowess.

"There is understandable relief in the financial markets this morning but that will not last," said Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubish UFJ

"Even assuming the best case scenario of no further bailouts, the necessary adjustments required to rectify internal imbalances in the euro zone are deeply deflationary and will quickly become evident by the underperformance of the euro-zone economy," Halpenny added.

Developments surrounding Ireland will likely continue to dominate activity in the markets this week, not least because the U.S. will effectively be shutting down from Wednesday onwards as traders head off the Thanksgiving break.

Earlier in Asia, investors were cheered by Sunday's aid request from Dublin.

Japan's Nikkei 225 stock average closed 0.9 percent higher, or 92.80 points, at 10,115.19 while South Korea's Kospi rose 0.2 percent to 1,944.34. Australia's S&P/ASX 200 added 0.3 percent to 4,643.5.

But Hong Kong bucked the trend, with the Hang Seng index falling 0.4 percent to 23,524.02 amid losses in property stocks after new measures to stem speculation. Singapore's benchmark also fell.

Chinese shares closed mixed in weak trading, as investors awaited further policy moves from the central government's upcoming economic work conference after inflation last month hit a 25-month high.

The benchmark Shanghai Composite Index slipped 0.2 percent to 2,884.37. The Shenzhen Composite Index for China's smaller, second exchange climbed 1.2 percent to 1,313.57.

In the oil markets, benchmark crude for January delivery was up 85 cents to $82.83 a barrel in electronic trading on the New York Mercantile Exchange.