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Exchange Markets Not Calmed By Irish Bailout Details

Market CommentaryExchange Markets Not Calmed By Irish Bailout Details

It was another pessimistic day for the euro yesterday!

Ireland’s Prime Minister Brian Cowen had hoped to restore market confidence in his nation’s finances by announcing the details of his planned austerity budget. These details included cutting public sector jobs by 25k and shrinking the welfare state by 14% – earning Cowen the wrath of not only Ireland’s political parties but the public too.

Yet the markets were not reassured! Economists were incredulous at projections that Ireland’s economy could grow against a background of sweeping cuts. In addition Ireland’s political future looks uncertain: parties including the Irish Greens have not pledged support for the austerity budget.

To make matters worse in the EU, the German Chancellor Angela Merkel has commented saying she intends to impose ‘bondholder haircuts’ on EU banks. This means that investors in EU banks could be forced to share the risk if the banks default so that they lose their investment.

This exacerbated market tensions in Ireland: The spread between Irish and German government bonds rose 600bps yesterday. In addition the Chancellor’s comments also sent shockwaves across other EU periphery nations: costs of bondholder insurance policies also rocketed in Portugal and Spain.

In short uncertainty inside the EU means selling pressure on the euro remains strong.

This is likely to continue until the political situation inside Ireland is resolved, and German intentions toward investors in EU banks become clear. In addition speculation remains rife that Portugal will soon require an EU-IMF bailout, and this is not improving confidence in the euro.

Elsewhere, in the UK the Official of National Statistics confirmed that the UK economy grew by 0.8% in the last quarter on the back of strong exports. This is heartening news and suggests that Britain is not heading toward a double dip recession.

However the market reaction to the announcement was moderate: commentators pointed out that until the coalition government’s spending cuts come into effect next year it is difficult to assess the state of the UK economy. Hence though the announcement boosted confidence in sterling the markets barely moved.

Yesterday was a quiet day for the US meanwhile as the markets prepared for today’s Thanksgiving Holiday. Although there will be no US economic announcements, with US markets closed we could see choppy trading conditions.

What can we expect tomorrow? For one the Germans are set to announce the November consumer price index figures. Strong figures are traditionally positive for the euro. However in the present political climate strong figures are likely to exacerbate the contrast between the German economy and those of EU periphery members. Hence good results could give Angela Merkel further incentive to impose ‘bondholder haircuts’ on investors, and worsen the EU crisis.

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