* EU hope Irish aid stops contagion to Portugal, Spain
* Ministers agree outlines of permanent crisis mechanism
* France, Germany say “irrational” markets should be calmed
* Private bondholders may take debt writedown post-2013
BERLIN/PARIS, Nov 29 (Reuters) - Germany and France declared on Monday that Europe had taken decisive action to save the euro by rescuing Ireland and laying the foundations of a permanent
debt resolution system, but investors were not convinced.
Under pressure to arrest the threat to the currency before markets opened and prevent contagion engulfing Portugal and Spain, EU finance ministers endorsed an 85 billion-euro ($115 billion) loan package on Sunday to help Dublin cover bad bank debts and bridge a huge budget deficit. They also approved the outlines of a long-term European Stability Mechanism (ESM), based on a Franco-German proposal, that will create a permanent bailout facility and make the private sector gradually share the burden of any future default.
“This is a measure which is not simply a single shot taken in response to an important crisis, it forms part of the absolute determination of Europe -- of France and Germany – to save the euro zone,” French government spokesman Francois Baroin told Europe 1 radio.
German Finance Minister Wolfgang Schaeuble said now that clarity had been achieved, “we are hoping for calming and reality in the financial markets”, where he said speculation against euro zone countries was “hardly rational”.
And French Economy Christine Lagarde said “irrational”, “sheep-like” markets were not pricing sovereign debt risk in Europe correctly.
Initial market reaction to the deal in Asia was cautiously negative. After a brief jump, the euro fell to a two-month low of $1.3183 before recovering to trade close to Friday’s levels.
The risk premium investors charge to hold Irish, Spanish and Portuguese bonds rather than safe-haven German bunds fell only slightly in early London trade.
“There are still lingering worries about the rest of the countries, including Portugal and Spain,” said Lorraine Tan, director of Asian equity research at ratings agency Standard & Poor’s. “It does raise risk worries and there are less people willing to take risk at this stage.”
Crucially, the European Stability Mechanism could make private bondholders share the cost restructuring a euro zone country’s debt issued after mid-2013 on a case-by-case basis.
The lack of detail in an earlier Franco-German deal on a crisis mechanism, agreed last month, and talk of private investors having to take losses, or “haircuts”, on the value of sovereign bonds, helped drive Ireland over the cliff.
NO SILVER BULLET
Irish Prime Minister Brian Cowen expressed, who for weeks denied Dublin needed a bailout, expressed satisfaction with the deal despite the interest rate of close to 6 percent which Ireland will have to pay on the loans. “This agreement is necessary for our country and our people. The final agreed programme represents the best available deal for Ireland,” Cowen said.
Ireland was given an extra year, until 2015, to get its budget deficit down below the EU limit of 3 percent of gross domestic product in an acknowledgment that austerity measures will hit economic growth in the next four years.
But initial reactions from market analysts to the EU moves ranged from sceptical to bleak.
“I don’t think this is going to be a silver bullet. I think there are still going to be some question marks on Portugal and Spain,” said Peter Westaway, chief economist at brokers Nomura.
“I think it is almost impossible now to stop the contagion,” said Mark Grant, managing director of corporate syndicate and structured debt products at Southwest Securities in Florida.
International Monetary Fund procedures would apply in the ESM. The IMF’s “lending into arrears” policy stipulates that the Fund will lend to a country that is making good-faith efforts to come to an agreement with bondholders.
European Central Bank President Jean-Claude Trichet said in Brussels the important points were that the IMF’s doctrine would apply, the European Union would not get involved in debt restructuring itself and existing bondholders would not be hit retroactively.
European officials have been at pains to play down the links between Ireland and Portugal, widely seen as the next euro zone “domino” at risk. Troubles in Portugal could spread quickly to Spain because of their close economic ties.
Debt worries have driven the crisis for the past year, severely denting confidence in the 12-year-old euro currency and producing what amounts to a showdown between European politicians and financial markets.
The proposed permanent crisis resolution mechanism, to be finalised in the coming weeks, is intended to prevent Europe having to rush like a fireman from one blaze to another.
But it breaks several longstanding taboos:
- it effectively tears up the “no bailout” clause in the EU treaty, to which a exception had already been made for Greece;
- it creates a permanent rescue mechanism to replace the temporary three-year facility established in May;
- it accepts for the first time the possibility of a sovereign default in the euro zone;
- and it allows for the possibility of making private bondholders share the cost with taxpayers after mid-2013.
Whether that will provide investors with the certainty and reassurance that investors sought will be demonstrated in the bond markets in the coming weeks as EU leaders seek to turn a political agreement on the ESM into treaty law.
Europe’s bank shares rise after Irish rescue deal
LONDON, (Reuters) - European bank shares rose early on Monday in a cautiously positive reaction to an 85 billion euro ($112.6 billion) rescue of Ireland aimed at halting the spread of its banking crisis to other euro zone countries.
By 0810 GMT the DJ Stoxx European banking index was up 1.5 percent at 196.8 points
Irish bank shares rose despite the prospect the state will own more of the top two lenders, and Allied Irish Banks was up 8 percent and Bank of Ireland up 17 percent. Portugal’s Millennium bcp added 1.3 percent while Spain’s Santander and BBVA each rose 1.5 percent.
Analysts said there was relief that senior bondholders will not be forced to take a “haircut” under the rescue plan, which could have caused financing problems for all Europe’s banks.
The reaction was cautious, however. “Our initial thoughts are that they will do little to alleviate concerns among debt and equity investors in the short term (and may even exacerbate the sovereign debt crisis), although the changes being implemented are the right thing to do morally in the longer term,” said Andrew Lim, analyst at Matrix.
European Central Bank policymaker Christian Noyer sought to bolster market confidence in the IMF/EU rescue for Ireland, telling cagey investors they should have faith in the plan’s success.
Banks lead FTSE higher on Irish deal
LONDON, (Reuters) - Britain’s top share index rose on Monday, buoyed by banks which recovered after sharp falls in the previous session, as the European Union finally agreed a rescue package for debt-strapped Ireland.
By 0905 GMT, the FTSE 100 was 52.80 points, or 0.9 percent, higher at 5,721.50, having closed down 0.5 percent on Friday.
“I think the market’s up on the back of the lack of negative news coming out over the weekend, certainly with regards to Europe,” Manoj Ladwa, senior trader at ETX Capital, said.
“And also we’ve got the U.S. futures trading in positive territory ... so the momentum seems to be on the upside, but volumes are still very low,” he said.
EU finance ministers on Sunday endorsed an 85 billion euro ($115 billion) loan package to help Ireland cover the country’s bad bank debts and bridge its budget deficit, and approved the outlines of a permanent crisis-resolution system.
Risk sensitive banks were in demand, with Royal Bank of Scotland adding 4.5 percent and Lloyds Banking Group 2.6 percent firmer.
Euro near 2-mth low
LONDON, (Reuters) - The euro hovered near two-month lows against the dollar on Monday as investors looked past a rescue package for Ireland to debt problems in other peripheral euro zone economies and sold the currency on any bounce.
“The euro remains a sell on rallies and any relief is temporary,” said Ankita Dudani, G-10 currency strategist at RBS Global Banking. “Ireland is taken care of but now the question is whether Portugal needs help this year or the first thing next year. And then you have Spain.”
The euro was up marginally at $1.3255, having fallen as far as $1.3182 earlier in Asia. It fell through its 100-day moving average on Friday, a bearish signal, and the next target is its 200-day moving average currently at $1.3131.
Euro/dollar implied volatilities maintained their recent ascent, reflecting nervousness about the single currency.
One-month inched up to 14.35 percent from 13.60 on Friday, while risk-reversals increasingly bid for the downside. The one-month 25-delta was trading around 1.95 for euro puts versus 1.85 on Friday.
Many traders think the European Financial Stability Facility, a joint EU-IMF fund created in May, may not have enough funds to support Spain if it needs help.