Euro slides as Europe's debt crisis spreads

[November 24, 2010]  LONDON (AP) -- The euro slid to a two-month low Wednesday amid mounting worries that Europe's debt crisis was spiraling out of control and heading for Portugal and Spain, while stock markets recovered their poise after military clashes on the Korean peninsula.

With the embattled Irish government poised to present another batch of spending cuts and tax hikes to get a massive financial bailout, a public sector strike in Portugal and worries over Spain's ability to service its debt, the euro was down 0.5 percent at $1.3297. That is the lowest level since September 24.

Stocks in Europe held their own after big falls on Tuesday but the buying momentum was muted.

The FTSE 100 index of leading British shares was up 30.09 points, or 0.5 percent, at 5,611.37 while Germany's DAX rose 43.39 points, or 0.7 percent, at 6,748.39. The CAC-40 in France was 7.12 points, or 0.2 percent, higher at 3,731.54.

Wall Street was also poised for a modest bounceback at the open later, though trading could well be volatile ahead of Thursday's Thanksgiving Day holiday -- Dow futures were up 31 points, or 0.3 percent, at 11,045 while the broader Standard & Poor's 500 futures rose 4.1 points, or 0.4 percent, to 1,182.40.

The main focus in the markets now that tensions in the Korean peninsula receded -- at least in the eyes of investors -- is the growing fear that Europe's debt crisis is a long way from being solved.

In Portugal, the country's workers are taking to the street in protest at the government's austerity measures, stoking concerns in the markets that the government will not be able to do much to get a handle on its debts.

"Today's strikes suggest Portugal has limited appetite for further austerity," said Rabobank International analyst Jane Foley.

Bond investors have targeted Portugal, pushing the rate on its 10-year bonds up 0.18 percentage point to 7.08 percent, a potentially unsustainable level over the longer term.

The market rate for ten-year Spanish bonds also spiked 0.18 percentage point, to 5.08 percent.

"The continued political turmoil in Ireland appears to have become almost secondary as fears about a Spanish contagion roiled investors, as fears rise that European leaders are starting to lose control of the situation, in what could fast become a slow motion train wreck," said Michael Hewson, market analyst at CMC Markets.

The consensus in the markets is that the European Union, or at least the 16 countries that make up the single currency bloc, can sustain bailing out the small countries like Greece and Ireland and even Portugal.

If Spain is left with no alternative but to tap its partners to pay off its debts, then some believe the euro project itself could be in jeopardy. Spain accounts for around 10 percent of the eurozone economy, in contrast with the other three countries, which account for around 2 percent each.

Spain has two more bond auctions scheduled for this year.

"Investor appetite at these auctions will be an important litmus test as to whether or not Spain has done enough to hold investor confidence," said Foley of Rabobank.

A number of analysts are blaming German Chancellor Angela Merkel for much of the current turmoil in the markets. Once again, she said Tuesday that the euro faces serious risks from the highly indebted countries.

"Merkel's comments were very unhelpful because they give the impression that she wouldn't mind if the periphery countries fall out of the euro," said Neil MacKinnon, global macro strategist at VTB Capital. "The bond market vigilantes are certainly seeing a turn for the worst in all this and in the short-term are focusing on Spain."

In Ireland, Sunday's confirmation by the government that it has requested a financial helpline, potentially worth up euro90 billion, has done little to calm matter.

Investors are particularly worried that the activation of the bailout will not be as smooth as hoped, as Ireland's premier Brian Cowen fights for his future. Lawmakers in his own party have mounted a rebellion to try to oust him, an effort that could trigger a snap election and delay a massive EU-IMF bailout of Ireland.

On Monday, Cowen pledged to call elections early next year if an austerity budget is passed. His announcement was triggered by the decision by the Green Party to withdraw its support for the government, even though it pledged to back the 2011 budget, due to be unveiled on Dec. 7.

Adding to the concerns was confirmation earlier that Standard & Poor's has lowered its credit ratings on Ireland, citing the country's imminent EU-IMF bailout and its long-term struggle to reduce deficits and return to stable growth.

The credit ratings agency lowered its long-term rating on Ireland's financial reliability two notches to A from AA- and kept a negative outlook, meaning further downgrades are possible.

Earlier in Asia, investors had their first real opportunity to respond to the artillery clash between North and South Korea Tuesday, which sent tensions on their divided peninsula soaring. South Korea's financial markets opened sharply lower -- 2.4 percent -- before quickly paring losses; the Kospi finished the day only 0.2 percent lower at 1,925.98.

Japan's Nikkei 225 stock average fell 0.8 percent to 10,030.11, after briefly falling below the 10,000 mark earlier in the session. Hong Kong's Hang Seng index finished 0.6 percent up to 23,023.86. On the mainland, Chinese shares rebounded in active trading, with the benchmark Shanghai Composite Index gaining 1.1 percent, to 2,859.94.

Benchmark oil for January delivery was up 24 cents to $81.73 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

AP Business Writer Pamela Sampson in Bangkok contributed to this report.

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