New debt crisis lashes Europe

28 November 2010 - 02:00
By Global Wrap : Pan Pylas

Stocks and the euro fell on Friday as investors were unsettled by the seeming inability of European policymakers to get a handle on the debt crisis, which threatened to engulf Portugal - widely considered the weakest eurozone economy after Greece and Ireland.

The latest bout of jitters was stoked by a report suggesting Portugal's partners in the European Union were urging it to seek aid to prevent a sustained attack from bond market speculators.

Though the report from FT Deutscheland, which cites unnamed European Central Bank officials, has been denied by the European Commission, the ECB and the German government, investors remain on edge. There were conflicting reports over whether the EU would be willing to boost the size of its financial backstop and whether Irish bank bondholders would be forced to take a hit in the country's rescue plan.

Germany and France have meanwhile said they would like faster progress in solving the debt crisis.

With so much uncertainty surrounding Europe's response to its continuing debt crisis, sentiment in the markets took a turn for the worse.

"This confusing 'pea-soup' of indecision, vacillation and disunity by the EU is beginning to create unnecessarily seismic waves of fear in international bond and money markets," said David Buik, markets analyst at BGC Partners.

In Europe, the FTSE 100 index of leading British shares closed down 30.23 points, or 0.5%, at 5669 while Germany's DAX fell 30.68 points, or 0.5%, to 6849. The CAC-40 in France ended 31.77 points, or 0.8%, lower at 3729.

In the US, the Dow Jones industrial average was down 96 points, or 0.86%, at 11092, while the broader Standard & Poor's 500 index fell nine points, or 0.75%, at 1189.

"With US markets open for half the day and still in Thanksgiving mode, they have had little impact on this side of the pond, but there is plenty going on in Europe for investors to concern themselves with," said David Jones, IG Index market strategist.

European stocks had been even lower earlier, before government bond markets were steadied somewhat by Portugal's parliament approving another austerity package.

The prevailing view in the markets is that Europe may be able to support Portugal but that a bailout of Spain would test the limits of the existing bailout fund, potentially putting the euro project itself in jeopardy if governments do not put up more cash. Spain accounts for about 10% of the eurozone economy, compared with the other three countries, which make up about 2% each.

That concern has dogged the euro all week despite the embattled Irish government's formal request last Sunday for a massive bailout from its partners in Europe and the International Monetary Fund. Following its announcement of another à15-billion worth of tax hikes and spending cuts on Thursday, the expectation is that Ireland will soon get its hands on the bailout - which is expected to be around à90-billion.

As if Europe's debt crisis was not enough, tensions on the Korean peninsula ratcheted up again after fresh artillery fire was heard hours after North Korea warned that it was on the brink of war. On Tuesday, four South Koreans were killed when North Korea unleashed a brief hail of artillery on the small South Korean island of Yeonpyeong. - Sapa-AP