Euro drop, rate rises spread eurozone drama to Spain, Italy

30th November 2010, Comments 0 comments

The euro plunged and eurozone debt pressure rose again on Tuesday amid warnings that pricing eurozone debt is now so risky that funds may desert countries exposed after Ireland, such as Portugal and Spain.

The euro dropped under 1.30 dollars on Tuesday for the first time since mid-September to 1.2999 dollars -- the lowest point since September 16.

The upward pressure on 10-year borrowing rates for countries seen as at risk of needing a rescue, after Greece and Ireland, rose, with particular attention focused on Spain because the size of its economy puts it in a far bigger problem category

The borrowing rate for Spain rose to 5.667 percent from 5.46 percent late on Monday and for Portugal to 7.072 percent from 7.0 percent.

The gap between the Spanish and German borrowing rates widened to 3.0 percentage points, and the Italian gap to 2.09 percentage points.

Financial analysts warn that Spain is at high risk of eventually needing help to finance its debt and overloading EU safety nets, although the Spanish government strongly denies this.

At Pimco, a big fund heavily invested in government bonds, chief executive Mohamed El-Erian, said: "My concern is that indecisive management of problems in Greece and Ireland might lead investors to sell sovereign bonds issued by peripheral (eurozone) states as a preventive measure."

Pimco, a subsidiary of the German insurance group Allianz, had more than 1.2 trillion euros (1.57 trillion dollars) in assets under management on September 30.

He told the German newspaper Handelsblatt: "That would increase refinancing costs and problems in those countries."

He pointed to a concern which has been at the forefront of analyst comments for the last two weeks as pressure against Ireland, and also Portugal and Spain and now affecting Italy, rose.

"The longer the uncertainty over how investors will participate in losses lasts, the greater the probability that they withdraw from the market" for government bonds, El-Erian said.

Speaking after financial markets had pushed down the euro and pushed up borrowing rates for several eurozone countries including Ireland on Monday despite a rescue deal for Ireland at the weekend, he also commented that the rescue had "gained time" for Ireland.

"The European Union and International Monetary Fund decision shifts the problem, (but) it does not resolve the country's problems," he said.

At CitiFX, a branch of Citigroup, analyst Valentin Marinov commented that the fall of the euro "signals that investors remain more focused on potential contagion to other eurozone countries than they do the situation in Ireland."

He said: "A failure from the euro to rally on this development (the Irish rescue) suggests investors do not believe the package goes far to averting strains in countries such as Portugal and Spain."

Capital Economics analysts said that the details of the Irish rescue had "hardly soothed" investors' nerves and pressure rose on interest rates paid by Portugal and Spain.

"We do not expect the upward pressure on peripheral yields to relent any time soon, which would keep downward pressure on the euro," they said.

© 2010 AFP

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