Irish debt crisis stalks Europe's markets

[November 15, 2010]  LONDON (AP) -- Europe's stock markets mostly fell Monday while the euro was battered again amid mounting fears that Ireland will end up having to look for outside financial help to get a handle on its mounting debt burden.

The FTSE 100 index of leading British shares was down 18.85 points, or 0.3 percent, at 5,778.02 while the CAC-40 in France fell 12.47 points, or 0.3 percent, to 3,816.65. Germany's DAX was up just over a point at 6,735.76.

Wall Street was poised for modest gains at the open -- Dow futures were up 11 points, or 0.1 percent, at 11,163 while the broader Standard & Poor's 500 futures rose 2.2 points, or 0.2 percent, at 1,197.60.

Investors are jittery at the moment amid reports that the Irish government is in talks with the European officials to discuss the country's debt position. All eyes are likely to shift towards Brussels Tuesday when the finance ministers of the 16 countries of the eurozone meet, with Ireland more than likely to top the agenda.

Though the Irish authorities have claimed that they have made no application to tap a financial support package implemented after the bailout of Greece in May and continue to insist that they don't need any more money until June, a number of investors think the country will have no choice but to seek outside help, primarily because of the shaky state of its banks.

"Greece adopted a similar tactic right up until it formally asked for international assistance," said Ben May, European economist at Capital Economics.

The worry that Ireland will be forced to request international help has been particularly evident in the currency markets where the euro has taken a battering -- by late morning London time, the euro was down 0.7 percent on the day at $1.3607.

What's particularly worrying for EU policymakers is that Ireland's problems may spill over to other countries on the so-called periphery of the eurozone -- that's certainly considered a possibility in the markets, which have priced up the cost of Portuguese and Spanish debt, alongside those of Ireland's. The Greek and Portuguese governments are due to present their budgets for 2011 this week, while Spain is due to hold bond auctions on Tuesday and Thursday.

"While Ireland does not need to access capital markets until mid-2011, it is the risk of contagion to Spain and Portugal which seems to concern EU policymakers," said Neil MacKinnon, global macro strategist at VTB Capital.

Even though Greece got a euro110 billion bailout in May from its partners in the eurozone and the International Monetary Fund, the country still has the potential to generate worries in the markets.

The news earlier that Greece's 2009 budget deficit was nearly two percentage points higher than previously predicted at 15.4 percent of the country's gross domestic product did not cause much of a stir in the markets as the EU's statistics office had already indicated that an upward revision was likely. It also said all the issues surrounding the unreliability of Greece's data have been addressed and that it no longer had any reservation over the Greek numbers.

More important to markets was the fact that Greece's governing Socialists emerged the winner of local government elections, despite a record low turnout and renewed pressure on the crisis-hit nation to impose a new round of drastic spending cuts. Its candidates won eight of 13 races for regional governor, including greater Athens -- giving Prime Minister George Papandreou a badly needed boost amid recession and rising unemployment.

Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole, said the results suggest that support for deficit cutting measures remains intact, reducing the prospect of early general elections.

However, Kotecha noted that reported comments from Greek Prime Minister George Papandreou over the weekend that he does not rule out extending the repayment terms of the $110 billion "will not auger well for sentiment."

The outcome of the results comes as an an EU and IMF team visits Athens to assess the country's progress in meeting its debt reduction obligations and whether the country should receive its third installment of the bailout package.

The other overarching concern in the markets aside from Europe's sovereign debt crisis is whether China will raise interest rates to cool inflation, which rose to a 25-month high in October. Any slowdown in the Chinese economy, the world's second-largest, would likely reduce its demand for oil, metals, grains and other imports.

Despite those concerns, China's Shanghai Composite Index gained 1 percent to 3,014.41 after tumbling more than 5 percent Friday on expectations Beijing will raise interest rates.

Hong Kong's Hang Seng shed 0.8 percent to 24,027.18, South Korea's Kospi gained less than 0.1 percent to 1,913.81 and Australia's S&P/ASX 200 dropped 0.1 percent to 4,688.00.

Japan's Nikkei 225 stock average rose 1.1 percent to 9,827.51 as the yen continued to weaken to the relief of the country's major exporters. Sentiment was also buoyed by the news that the Japanese economy grew by an annualized 3.9 percent in the third quarter of the year, more than double the previous quarter's 1.8 percent and way ahead of analysts' expectations for a 2.6 percent increase.

By late morning London time, the dollar was 0.5 percent higher on the day at 82.90 yen.

Benchmark oil for December delivery was up 47 cents at $85.34 a barrel in electronic trading on the New York Mercantile Exchange. The contract dropped $2.93, or 3.3 percent, to settle at $84.88 on Friday.

[Associated Press; By PAN PYLAS]

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