Collapse of the Global Economy

Irish Crisis, Contagion Fears Loom Over EU Meeting

November 16, 2010

AP – Europe's debt crisis hit a critical juncture Tuesday, as finance ministers tried to keep Ireland's market turmoil from triggering a domino effect that could topple other vulnerable nations like Portugal and rock the region's currency union and shaky economic recovery.

Only months after saving Greece from bankruptcy in May, the 16-country eurozone has been shaken anew by concerns that Ireland will be unable to pay the cost of rescuing its banks, suggesting only another bailout can now soothe investors' panicky nerves.

The European Union's top monetary official, Olli Rehn, said the focus was on the banks as the EU works with the European Central Bank, the International Monetary Fund and national governments at a crisis meeting in Brussels.

"The (European) Commission, together with the ECB, IMF, and the Irish authorities are working in order to resolve serious problems of the Irish banking sector and I expect that the eurogroup will support this objective," said Monetary Affairs Commissioner Olli Rehn.

"This is not a matter of the survival of the euro, this is a very serious problem in the banking sector of Ireland."

Jean-Claude Juncker, who heads the group of 16 nations use the euro, said that the euro750 billion financial backstop eurozone governments set up together with the IMF last spring could be used to support the Irish banks.

European nations are worried that the tension over Ireland's stability is making borrowing more expensive for countries like Portugal and Spain, threatening to push them to the brink of default, as happened with Greece. Containing contagion — a market panic that jumps from one weak country to the next — is the priority.

Behind Ireland stands Portugal, one of the eurozone's smaller member with 1.8 percent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big — 11.7 percent of eurozone output — that it could present a much larger challenge if it needs help.

More tensions flared up again over Greece — which was bailed out by eurozone governments and the IMF this spring.

Austrian Finance Minister Josef Proell said that Austria hasn't yet released its contribution to the next tranche of the euro110 billion emergency loan because the country hadn't fulfilled the requirements of the bailout agreement.

"If they miss the targets we need to have a discussion," Proell said. "I'm prepared to pay out the tranche once the figures fit."

The EU statistics agency on Monday said Greece's 2009 budget deficit was much higher than previously expected. To receive the next portion of the loan, Athens has to cut its deficit by a certain amount every year.

Greek Finance Minister George Papaconstantinou defended his country's performance.

"Greece during 2010 performed the largest consolidation effort ever seen in the eurozone," he said. "We will fully respect our 2011 targets and intend to take all necessary measures."

The current panic over Ireland began in the wake of revelations that the cost of Ireland's bank bailout had risen sharply. Sentiment also came under pressure after Germany said bond holders should absorb part of the losses in future bailouts. EU leaders slowed a bond sell-off with a statements that existing debt holdings wouldn't be affected, but couldn't restore calm.

Austria's Proell warned that it was necessary to act fast on Ireland to avoid a situation similar to the bailout of Greece, where foot-dragging drove up the final bill.

"We now have to be careful that waiting games or reluctance to take a decision don't create bigger problems or the danger of contagion for other countries," Proell said.

Ireland has resisted any notion it should take a bailout, which would mean humiliation for the government ahead of possible national elections early next year. Ireland would also lose some control over its finances in return for loans, which could mean being forced to give up the country's rock-bottom corporate tax rate — a key attraction to businesses that annoys other EU countries that have much higher rates.

Yields on Irish bonds rose again Tuesday as investors' expectations ebbed for an early decision on an Irish bailout — which would be expected to guarantee they will get paid back on their holdings. The yield on 10-year Irish treasuries rose to 8.24 percent from Monday's closing yield of 7.94 percent.

Ireland's minister for European affairs, Dick Roche, suggested that others in the EU were panicking over how to manage Ireland's euro45 billion ($61 billion) bank-bailout bill and its deficit, which is forecast to reach a staggering 32 percent of GDP this year, a record for post-war Europe.

"I would hope that after the meeting this afternoon and tomorrow there would be more logic introduced to this. There's no reason why we should trigger an IMF or an EU-type bailout," Roche said. "There is a problem with liquidity in banks, but I don't think the appropriate response to that would be for European finance ministers to panic."

Ireland says it has sufficient cash to fund government services through June 2011, and has postponed returning to the bond market until early 2011 in hopes that the interest rate demanded by investors will have fallen by then.

Ireland's banks are in dire trouble due to reckless lending during an overinflated real estate bubble. The government has taken over three — Anglo Irish, Irish Nationwide and the Educational Building Society — and has taken major stakes in Allied Irish Banks and Bank of Ireland. Allied Irish is expected to fall under majority state control within weeks.

David McWilliams, a former Irish Central Bank economist and prominent commentator, said Ireland's only card worth playing in this week's Brussels meetings was to admit defeat and stress that Ireland's problems were Europe's responsibility, thanks to the euro currency.

McWilliams said Ireland should agree to let the European Central Bank — which has full-time observers inside the Department of Finance in Dublin — take "direct responsibility for the Irish banks, over and above the Irish government."

That would keep the Irish banks from contaminating the bond market, easing the market turmoil for everyone.

"We need finally to be honest and say to our European colleagues that our banks are bust," he said. "No matter how much we bluff, that problem's not going to go away — and our problem is your problem. You have got to help us, because your problem could transfer from Ireland, Portugal and Greece to Spain and Italy. Although it's not pleasant, we've got to defend ourselves. We've got to say we're in this euro together, so what are you going to do for us?"

In an interview with French newspaper Le Figaro published Tuesday, Greek Prime Minister George Papandreou insisted his country won't default on its euro298 billion in debt because doing so would be a "catastrophe" for Greece, Europe and the euro.

On Monday, Greece said this year's deficit would likely reach 9.4 percent, well above the 8.1 percent level it forecast earlier this year when it received a euro110 billion bailout from European partners and the International Monetary Fund.

Portugal, which is struggling with high budget deficits, also saw itself forced to deny rumors that it would seek financial assistance.

Stocks Retreat on Asian Inflation, Euro Debt Fears

Stocks fall on worries about rate hikes in Asia, possible bailouts in Europe; Dow off 200

November 16, 2010

AP - Stocks are tumbling as worries mount about inflation in Asia and a possible bailout for Ireland.

The Dow Jones industrial average lost 200, dipping below 11,000 for the first time in nearly a month.

Asian markets set off a global sell-off Tuesday as South Korea raised a key interest rate. There is speculation China will do the same in the coming days, which would dampen its demand for basic materials and cool growth.

In Europe, finance ministers are meeting to decide whether Ireland needs a bailout similar to the one given to Greece.

The Dow is down 209 at midday, or 1.9 percent, at 10,993. The S&P 500 index is down 23, or 1.9 percent, to 1,175, while the Nasdaq composite is down 51, or 2 percent, at 2,463.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

Stocks retreated Tuesday following new worries about rising inflation in Asia and the possibility Ireland might need a bailout.

The Dow Jones industrial average fell 125 points in late morning trading. The losses piled up even as shares of two components of the index, Home Depot Inc. and Wal-Mart Stores Inc., rose following improved earnings.

Asian markets fell overnight after South Korea's central bank raised interest rates to curb growing inflation. There has been speculation in recent days that China will have to take similar steps soon.

Commodities fell because of the worries that China's economy might grow more slowly as well. That, in turn, hurt energy and materials stocks. Alcoa Inc. and ExxonMobil Inc. shares were off about than 2 percent, while Freeport-McMoRan Copper & Gold Inc. fell more than 4 percent.

A report in the U.S. showed inflation at the wholesale level was smaller than predicted. The producer price index rose 0.4 percent last month, half of what economists' expected. The rise was due to a sharp increase in food and energy costs. Stripping out those volatile costs, prices fell 0.6 percent. The report backs up the Federal Reserve's view that inflation remains low because of sluggish growth.

Moves by central banks to increase interest rates would not only act to slow inflation, but also to slow economic growth in Asia. The moves stand in stark contrast to the U.S., which has been trying to drive interest rates even lower to spark growth, which has been sluggish.

Asian economies have been expanding rapidly while the U.S. and much of Europe have been slow to recover from a global recession. The strength in Asia has helped many companies post big profits. So any potential for a slowdown in Asia without further expansion elsewhere could cut into earnings, which hurts stocks.

While Asian countries are dealing with strong growth, European finance ministers are meeting Tuesday. They are expected to discuss a potential bailout for Ireland, which is the latest country to struggle with mounting government debt. Similar problems in Greece earlier this year hurt stocks worldwide as its government received aid to help cover debt problems.

"It's been simmering for a while," Scott Brown, chief economist at Raymond James & Associates, said of the European debt problems. "Now it's coming to a complete boil."

Brown said Ireland is more troublesome for Europe than Greece because more of Ireland's debt is held by big banks, particularly ones in Great Britain. A default by Ireland could be another blow to banks that have only recently recovered from the global credit crisis ...

In corporate news,General Motors raised the price range for its common stock to $32 to $33 when it launches an initial public offering Thursday. Strong demand for the shares has led the automaker to raise the IPO price from a range of $26 to $29.

The higher price would help the U.S. government recoup more of the taxpayer-finance bailout that General Motors received. The common shares are being sold by the U.S. government, the Canadian and Ontario governments and a union health care trust fund.

GM has also added 20 million shares of preferred stock to the IPO. The automaker will now sell a total of 80 million shares of preferred stock for $50 each.

Meanwhile, Treasury yields retreated from a three-month high as investors moved into the safety of bonds. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.87 percent from 2.95 percent late Monday.