Article first published as European Debt Crisis Deepens, Spreads to More Countries on Blogcritics.
Ireland bailout worth 85 billion Euros could not convince the markets that the crisis would not spread to other indebted Eurozone countries. On Tuesday, debt costs of Portugal, Spain and Belgium have touched life time high levels in euro’s 12-year history. Late on Tuesday ratings agency placed Portugal on credit watch over its huge debts, signalling the next country to ask for joint aid from the EU and IMF would be Portugal as per BBC News.
Portugal’s central bank warned about the risks being faced by its banks. Failure of the Portugal government in consolidating public finances may lead to Portugal banks to face intolerable risks, the central bank warns. France already came forward saying it will support to help Portugal and Spain if such a need arises. Financial officials in France and Germany accused investors for acting irrationally on the threat of financial contagion.
The yield on Spain’s 10-year bonds reached to 5.7% on Tuesday, a record difference of 3.05% compared with Germany’s 10-year bond. Bond spread for Italy’s 10-year bond was at 2.1 percent over Germany’s bonds and Irish bond yield stood at 9.53% while Portuguese bond yield stood at 7.05% for 10-year bonds. However, the yields for governments bonds of these countries are reportedly lowered on Wednesday on speculation that the European Central Bank would take extra measures to save Euro from falling, Reuters reported.
Bombay Stock Exchange (BSE) has recorded a 1.9% rise on Monday, November 22 indicating that the investors are not worried about the political deadlock in India over 2G spectrum-scandal. Rather they have concentrated on the Ireland’s bailout programme, which feared will spread debt crisis to other highly indebted countries such as Portugal and Spain.
Broader National Stock Exchange (NSE – Nifty) has recorded 2.03% rise, once again crossing 6000 mark. On last Friday, the Sensex (BSE) was down by 1.7% with fears that the Prime Minister will resign on Supreme Court’s reprimand over his indecisiveness for 16 months and his denial for the prosecution of the former Telecom minister. The resignation of a market oriented Prime Minister will be a saddening news for markets.
The Comptroller Auditor General has implicated the Telecom minister in allocating 2G spectrum at cheap costs to a few chosen private companies on first-cum-first basis instead of going for auction. The CAG alleged the minister has caused the government to lose nearly $39 billion (Rs. 1.76 lakh crore) in revenue. The opposition parties are halting parliament proceedings for two weeks over the spectrum scandal demanding constitution of JPC (Joint Parliamentary Committee) to probe into the scandal.
Irish rescue programme discussed on November 21 has helped raise Euro value and share markets. Though full details are yet to be discussed in coming days, the mere announcement that the Ireland has been offered bailout package has satisfied the markets, it seems.
Ireland government initially denied that it would need bailout but finally admitted it would need one on Thursday, November 18. Reuters report has suggested the bailout amount would be between 80 and 90 billion euros. This is less than the bailout sanctioned to Greece, 110 billion euros. Yesterday, Sunday Telegraph has speculated the bailout amount would be 120 billion euros. But, Ireland finance minister has said the amount might not cross two-digit figure. Ireland bailout will be disbursed over 3 years.
Ireland President has requested solidarity from his people. Irish people will be facing income tax raise as a result of conditions that will follow the aid package.
As Ireland’s borrowing costs have been pushed to record highs, it is in talks with EU officials to claim bailout from European Financial Stability Fund (EFSF). The EFSF was agreed upon by the EU and the IMF in June as a safety net to help prevent indebted Eurozone countries from slipping into debt crisis, in response to Greece crisis.
Under the EFSF the 16 states of the Eurozone will provide 440 billion euros, in emergency loans to rescue crisis hit countries. The EFSF also constitutes 60 billion Euros from all 27 EU countries and 250 billion euros from the IMF, totaling to about 750 billion euros or one trillion dollars.
Greece was the first country to receive emergency loan from the combined package of the EU and the IMF in June 2010. Now Ireland is on the verge of knocking EMSF’s door. Reuters quoted two unnamed official sources from EU authorities that Ireland was in talks with EU officials to discuss aid mechanism. But, the aid may be announced only in the first week of December.
Ireland is said to be well funded until the first half of the next year, so the aid will not be associated with haircuts like in the case of Greece.
However, Ireland denies that it is in talks with the EU, confirmed by the EU commissioner Jean Claude Trichet. The IMF managing director said he was not approached for aid to Ireland and added Ireland can manage its finances. Ireland was once the highest growth country among the Eurozone countries during first ten years since the Eurozone formation. Now it has budget deficit equal to 32% of its GDP, the highest among EU countries. It is more than ten times to the limit imposed by the Eurozone monetary system, i.e. 3 percent of GDP.
BBC News | Saturday, 13 March 2010 | 10:54 GMT
The EU is poised to reach agreement on a potential multi-billion euro bail-out for Greece after weeks of crisis, senior officials have told the BBC. They say the rescue package would be available if Greece asked for assistance to finance its huge deficit. Eurozone ministers are expected to finalise a proposal setting out a range of options as early as Monday. Greece has not requested help so far. The EU says no deal has been agreed but technical work is continuing. Greece is struggling to deal with a 300bn euro ($419bn; £259bn) debt. It needs to raise about 20bn Euros ($27bn) on bond markets to refinance debt maturing in April and May. Its deficit is more than four times higher than eurozone rules allow, and it is trying to reduce it with austerity measures that have provoked public anger. The crisis has also undermined the euro.
The BBC’s Gavin Hewitt in Brussels says the hope is that the proposed deal will be there as a last resort, and the funding will not actually be needed. Germany and France would be the main backers, with no contribution from Britain and other non-euro countries, our correspondent adds. European media reports say options being considered include the provision of loans to Greece and a bond issue guaranteed by eurozone countries. Officials are quoted as saying the the aid could amount to 25bn euros. The deal would have to be constructed to get around rules governing the euro