A rally on European currency and equities markets fizzled yesterday after optimism over prospects for an Irish rescue gave way to fears the move might fail to ease pressure on other eurozone states.
Analysts said investors also grew nervous during the day in the absence of detail as to the size and structure of the bailout, to be financed by the EU and the IMF, and the steps Ireland will have to take to stabilise its public finances.
Irish Prime Minister Brian Cowen said on Sunday his government had applied for help from the European Union and the International Monetary Fund to cope with a gaping public deficit and a troubled banking system, which has already received €50 billion in government backing.
While the amount of the package has yet to be revealed, European diplomats have said it could come to around €90 billion.
Political tension in Dublin surged yesterday, with Mr Cowen’s coalition administration appearing to be splintering over the deal as the Greens, the junior partners, called for a general election to be held in January. After moving above $1.37, the eurozone’s common currency, the euro, fell back and was trading late in the day at $1.3614 against 1.3673 on Friday.
It was a similar story on stock markets.
“Equity markets started this morning in a positive mood as investors appeared content... regarding the extent of Ireland’s imminent bailout,” said Giles Watts of City Index.
“However, as rumours regarding the details of Ireland’s bailout swirled around the market, the positive tone subsided.”
In London the FTSE 100 Index lost 0.91 per cent to close at 5,680.83 points while in Paris the CAC 40 fell 1.07 per cent to 3,818.89. In Frankfurt the DAX shed 0.32 per cent to finish at 6,822.05 points.
Elsewhere there were falls of 2.68 per cent in Madrid, 1.93 per cent in Milan, 0.63 per cent in Amsterdam and 0.38 per cent on the Swiss Market Index.
On Wall Street equities also turned weaker on concern that other struggling eurozone econo-mies may require aid.
The blue-chip Dow Jones Industrial Average was down 0.74 per cent at midday at 11,120.23 while the tech heavy Nasdaq had lost 0.06 per cent to reach 2,516.67.
“A full-fledged relief trade hasn’t kicked in because there is concern all this deal does is kick the can further down the road, as piecemeal bailouts leave the door open for speculative runs on other countries like Portugal, which many think is the next domino to fall in Europe,” said Patrick O’Hare of Briefing.com.
Irish bond yields, a measure of investor sentiment, eased only slightly late yesterday, with the rate on 10-year debt dropping to 7.869 per cent from 7.907 per cent on Friday. The yield earlier in the day had fallen sharply on initial market enthusiasm for the EU-IMF initiative.
Yields on debt issued by two other troubled eurozone members, Portugal and Greece, meanwhile rose.
Ireland is the second eurozone member to require outside assistance after Greece, likewise saddled with a huge public debt and deficit, was accorded a €110-billion credit mechanism by the EU and the IMF in May.
“Two eurozone countries have now been bailed out with uncertainties lingering over two more,” said Derek Halpenny of The Bank of Tokyo-Mitsubishi UFJ.
“Even assuming the best-case scenario of no further bailouts, the necessary asjustments to rectify internal imbalances in the eurozone are deeply deflationary and will quickly become evident by the under-performance of the eurozone economy.”
Analysts differed on the scale of the challenge confronting Ireland, where the government is seeking 2011 budget cuts worth €6 billion under a tough initiative that also calls for tax hikes.