By: Dr. Mike Campbell
Fears that Greece and Ireland might default on their debts forced the yield that they need to offer to attract investors to take up their bond issues up to record highs. The increased payment that these nations had to pay on their bonds pushed up borrowing costs and, of course, ratcheted up the danger of a default.
Although both nations protested that they could continue to service their debt and gave assurances that they would not default, jitters sent the Euro lower and an IMF/EU bailout funding was made available to them, largely to calm market fears and protect the single currency.
With the Irish austerity budget making its way through parliament and thereby ensuring that EU/IMF funds will be made available, nervous eyes have turned to Spain as the next candidate for a bailout and the ratings agency Moody’s is already muttering about dropping the nation’s credit rating a notch.
Meeting in Brussels last night, European leaders have agreed that a permanent mechanism will be put in place to help Eurozone member states which find themselves faced with exorbitant yield demands on their bonds.
The new facility will be available from 2013 when existing arrangements expire and will require that changes are made to the Lisbon Treaty. Access to the funds will be linked to strict conditions which an applicant must meet that are designed to bring their deficit or debt under control; just as Ireland and Greece have.
The move is designed to restore confidence in the Euro and make it clear to the market that the political will exists to ensure the healthy survival of the single European currency. It remains to be seen how forex markets will respond to the news.