Ireland's Relief Proves Fleeting as `Day of Reckoning' Nears

The financial costs of the most indebted countries in Europe are at record levels as a capitulation of Ireland in the acceptance of a plan to rescue its banking sector, fueling concerns that other countries will also have to seek help.

The average yield investors demand to hold debt to 10 years in Greece, Ireland, Portugal, Spain and Italy came to 7.56 percent today, a record of the era of the euro. The average premium investors demand to hold the values instead of German bonds widened to 488 basis points, the highest level of 2010. The average cost of insurance against default by the five nations using credit default swaps hit a record 517 basis points on November 23.

"It's not taboo to talk about restructuring," said Johannes Jooste, a portfolio strategist at Bank of America Corp. 's Global Wealth Management at Merrill Lynch in London, which oversees about $ 1.4 trillion for customers. "The fact that bond yields keep rising and pushing countries to be funded from the market makes investors less and less safe, and forward the moment of truth."

The relief rally on November 22 after the Irish Prime Minister Brian Cowen admitted that the nation needed temporary financial support. Ireland yields 10-year bond fell 4 basis points before jumping 100 basis points from 11 am today, more than 9 percent for the first time since 1995. euro was more than fleeting, rescue inspired a gain of 0.8 percent before the currency fell to a minimum of two months. It fell 0.9 percent to $ 1.3238 today.

Market volatility

"When Ireland agreed to help the overall market sentiment is that it could restore some calm, which has not been the case," said Michiel de Bruin, who oversees about $ 35 million at the head of European government debt to fruit C and the Netherlands in Amsterdam. "The authorities must do everything possible to calm the situation."

Morgan Stanley analysts said in a Nov. 11 report that any move by Ireland to use the European Financial Stability Fund will boost the euro and be a "switch" to the crisis of European sovereign debt. While Ireland have enough money to pay their debts until the middle of next year, has applied for a recovery of the European Union and the International Monetary Fund amid concerns about the cost of bailing out their banks would outweigh the public finances.

Portuguese Finance Minister Fernando Teixeira dos Santos said in an interview published today that EU governments can not impose a rescue plan in his country.

Most officials in the euro area and the European Central Bank are urging Portugal to accept the help that helps stop the spread to Spain, the Financial Times Deutschland reported today. German government spokesman Steffen Seibert said the nation is not putting pressure on Portugal to seek help. An official from the office of Portuguese Prime Minister Jose Socrates, also denied the report.

Greek Kickoff

The last stage of the debt crisis that began last year in Greece was initiated after EU leaders agreed Oct. 29 to examine the demand for German Chancellor Angela Merkel, a crisis resolution mechanism to force bondholders to share the cost of the bailouts in the future. The Stoxx 600 Banks Index of European shares fell nearly 8.8 percent in the last month.

Adding to the pressure is pushing the ECB to reduce liquidity support to banks.

"This firm stance is to revive a debt crisis in euro," wrote Greg Gibbs, senior currency strategist based in Sydney at the Royal Bank of Scotland Group Plc, in a research report dated 23 November. "The recent problems in Europe may be related to the fear that weak banks in the periphery is lost access to cheap financing from the ECB, and the deterioration in turn put more pressure on the sovereign."

Fund

Greece agreed to 110 million euros (145 million) in the rescue program in April, before the creation of 750 million European Financial Stability Fund in May as a backup of the common currency. Cowen said this week had been a ransom of € 85000000000 discussed for Ireland.

Authorities must prevent "dissemination of disaster" in the euro region, said Mohamed El-Erian, chief executive of Newport Beach, California, Pacific Investment Management Co. "The reassuring statements issued by European ministers in recent days is urgent translated into action ", wrote this week in an article in the Financial Times.

Analysts also say that much remains to be done. Portugal should apply preventive measures to curb the expansion of credit spreads between the debt of countries with high deficits and German bonds, according to WestLB AG.

"Haircuts enormous'

Bondholders of European banks have to accept "massive cuts" of its assets, the company said foreign exchange FxPro. Germany may adopt the euro to allow the currency to devalue, wrote Graham Turner, chief economist at GFC Economics, a consulting firm based in London.

"Time is of the essence", led a team of London-based analyst at Nomura International Plc by Nick Firoozye wrote in a note to investors on 24 November. "The continuing confusing political rhetoric is leading investors from outside Europe. Once the cycle of problems in the euro zone started in 2011, less than many of the issues related to collective action clauses, resolution mechanisms crisis and times have been resolved, policy makers may lose the battle. "