European Indexes Fall on Future Bailout Conditions Worries

Nigel Thomas
29 Nov, 2010
New York City

European indexes fell sharply after Ireland agreed to terms of bailout and investors worried that the debt contagion may not be prevented from reaching to Spain. European confidence index increased in October. Banks and insurance companies declined.

[R]4:45 PM Frankfurt – European indexes fell sharply after Ireland agreed to terms of bailout and investors worried that the debt contagion may not be prevented from reaching to Spain. European confidence index increased in October. Banks and insurance companies declined.[/R]

Markets in Europe were on the edge as the euro-zone debt crisis persists after European nations agreed to bailout terms for Ireland. Banks fell sharply in Frankfurt and London trading after Germany and France agreed to a watered down measure to spread cost of future bailouts to bond holders.

Indexes dropped as much as 2% before recovering in the late trading in Frankfurt, Paris and Milan.

Regulators and bankers rushed on late Sunday night to hammer out the details of Ireland bailout package that has left many with more questions.

Bankers and political leaders also agreed to loan funds to Ireland to stem the widening euro-zone crisis to Spain and spread the future costs of bailout to bond holders.

The European Union and the IMF agreed to a bailout of €85 billion or $113 billion to Ireland as it seeks capital to support its failing banking system.

Ireland agreed to pay 5.75% interest rate and Germany was seeking rates as high as 7.5% according to the sources in the European Central Bank.

European nations controlled funds will loan a total of €45 billion and the International Monetary Fund agreed to lend €22.5 billion. The remaining €17.5 billion will be provided by the Ireland controlled pension fund.

UK also agreed to directly lend €3.8 billion and additional funds into the IMF loan package with a total loan of €7.9 billion.

The weekend agreement failed to calm debt markets and yields on sovereign debts of peripheral nations traded at elevated levels in London and in Frankfurt.

Yields on 10-year Irish bonds hovered in the early afternoon just below 8.93%, on Portuguese bonds at 6.77%, on Spanish bonds at 5.3% and on Italian bonds at 4.5%.

Greek 10-year bonds declined to 11.51% and EU officials said that the nation will be given additional time to repay EU loans and the period will be extended from the current two-and-a-half years to seven year matching the debt repayment time given to Ireland.

European banks fell sharply after investors worried that future bailout may spread the costs to bond holder and banks. Societe Generale, BNP Paribas and Deutchse Bank fell more than 3%.

Bank of Ireland soared as much as 18% to 31.37 euros and Allied Irish plc gained 7.5% to 36.40 euros. The Irish banks advanced on the expectations that as much as 35 billion euros will be loaned by the government to banking industry.

Mixed economic data also played in the regions trading today. The organization for Economic Cooperation and Development recently lowered the economic outlook in the region to 1.7% in the current year and 1.5% in the next year.

However, confidence index across European executives and consumers showed an improvement. The index released by the European Commission in Brussels increased to 105.3 from 103.8 in October, the best since November 2007.