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November 17, 2010

Ireland to work with EU/IMF mission on crisis steps
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7:21am EST

By Carmel Crimmins and Annika Breidthardt

DUBLIN/BRUSSELS (Reuters) – Ireland committed itself on Wednesday to working with a European Union-IMF mission on urgent steps to help its stricken banking sector, a process that could lead to a bailout despite Dublin’s deep reluctance.

A team from the European Commission, the International Monetary Fund and European Central Bank will travel to Ireland on Thursday to examine what measures may be needed if Dublin decides to seek aid, euro zone finance ministers said.

Irish Prime Minister Brian Cowen emphasized that the mission would look at what assistance Ireland might need, again rejecting suggestions his government was discussing a bailout.

“What we want to concentrate on now is in a focused way, over coming days, to sit down and see in what way can assistance be provided to ensure that these issues can be dealt with properly and appropriately,” he told parliament.

“There has been no question of the government … (being) in a negotiation for a bailout,” he said, dismissing the term ‘bailout’ as pejorative.

“The government is not going to be formally involved in applying or in engaging in a facility or making a decision of that type without that preparatory work being considered.”

Irish Finance Minister Brian Lenihan said euro zone peers had welcomed his four-year, 15 billion euros budget-cutting strategy which he hopes to publish next week, suggesting he sees no need for further fiscal tightening.

But he admitted the banking sector needed more help.

“What may be required may not in fact be an actual transfer of money now but demonstration of how much money can be made available if further difficulties materialize,” he said.

Financial markets appeared unimpressed by Dublin’s decision to reject assistance, with the premium investors charge for holding Irish 10-year bonds rather than German Bunds rising to a near-record 595 basis points.

LCH.Clearnet, a clearing house for sovereign debt, doubled its margin requirement on Irish bonds to 30 percent of net positions, an indication of the increased risk of default.

The cost of insuring against default by Ireland jumped, with five-year credit default swaps widening by 25 basis points on the day to 545 bps, while those for Spain and Portugal also rose — a sign of the contagion that EU policymakers fear most.

Underlining those fears, Portugal’s borrowing costs soared at a treasury bill auction, with yields for 12-month paper jumping more than 150 basis points from a tender earlier this month.

The Irish government is hoping to avoid a humiliating rescue that could further weaken its grip on power, with a by-election scheduled for November 25, a vote that could reduce the government’s parliamentary majority to just two seats.

Lenihan dismissed suggestions that Ireland should raise its ultra-low 12.5 percent corporation tax rate to help cut its debt. Higher-tax countries, including Britain, have long seen the Irish rate as a form of unfair competition.

“Of course our corporate tax rate is safe,” he said.

But the euro zone is acting tough with Athens — on Tuesday ministers told Greece to cut its spending more to meet budget deficit reduction targets agreed as part of its bailout — and could attach stringent conditions to any Irish aid.

INEVITABLE?

While Ireland made no request for immediate EU rescue, resisting pressure to follow in Greece’s footsteps, economists said a state bailout remained a probability even though its public borrowing needs are funded until mid-2011.

“There is an air of inevitability that there will be some sort of bailout,” said Alan McQuaid, chief economist at Bloxham Stockbrokers. “Why come to Dublin if you are not going to give a bailout?”

EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

Euro zone sources said there was an agreement in principle to trigger aid when the joint mission completes its work — perhaps in days — and the aid would not be just for the banks.

French Economy Minister Christine Lagarde said the mission to examine Irish banks should be seen in a broader context, saying it shouldn’t be seen as a plan just to help the banks.

HIGH STAKES

After Greece’s near collapse, the stakes are high. European Council President Herman Van Rompuy, who heads the body that groups the EU’s 27 national governments, said the EU’s future could be at stake, although others played down those risks.

Britain, whose banks have around $150 billion of exposure to Irish debt, said it stood ready to help, although it was unclear what steps it might take to assist Ireland.

“Ireland is our closest neighbor and it’s in Britain’s national interest that the Irish economy is successful and we have a stable banking system,” Chancellor of the Exchequer George Osborne told reporters ahead of an EU finance ministers meeting in Brussels.

Concern that Ireland’s crisis could spread to other weak economies in the 16-country euro area, such as Portugal and Spain, has unsettled markets and ramped up borrowing costs.

“You have to think the market is going to go after all of the periphery, trying to force them into a bailout, which should support Bunds,” a bond trader in London said.

Shares in Allied Irish Banks fell 8 percent. Driven to the brink by the global financial crisis and a property crash, the shares are down 70 percent this year. The bank will be 90 percent state-owned by year-end.

Bank of Ireland, the country’s largest lender, signaled last week it had suffered a 10 billion euros outflow of deposits from early August until the end of September.

(Additional reporting by Dublin and Brussels bureaus, writing by Luke Baker, editing by Mike Peacock)

* NOVEMBER 17, 2010

Sweeping Irish Aid Package in Works

By MARCUS WALKER, PATRICK MCGROARTY, and CHARLES FORELLE
[IRELANDjp] Agence France-Presse/Getty Images

Pressure built on Irish Finance Minister Brian Lenihan, left, at a meeting in Brussels to accept a European plan to calm his nation’s debt crisis.

BRUSSELS—Senior European officials laid the groundwork for a bailout of Ireland that could reach €100 billion ($136 billion), saying experts would travel this week to Dublin to examine the country’s finances amid alarm about the dire straits of the Irish banking system.

Several euro-zone countries urged Ireland to adopt an aid package, according to people familiar with the matter, and some pressed for the package to include direct loans from the U.K. alongside assistance from Europe and the International Monetary Fund. Britain is in the European Union but not the euro zone.

But at a finance ministers’ meeting here, Ireland’s Brian Lenihan repeated that his country wasn’t ready to seek help despite a huge budget deficit and sky-high interest rates on its government debt. He said “urgent talks” were necessary to calm “serious market disturbances” that “jeopardize not only Ireland, they threaten the euro zone.”

Markets fear Ireland’s problems could spread the financial crisis into vulnerable members of the euro zone such as Portugal and Spain. Contagion of Spain, one of the continent’s largest economies, would greatly strain Europe’s rescue capacity and pose a severe threat to the euro’s survival.

EU President Herman Van Rompuy on Tuesday cast the Irish crisis as a decisive moment for Europe and its common currency. “We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone, we will not survive with the European Union,” he said.

European stock markets tumbled Tuesday amid the concerns over Ireland, with the steepest declines coming toward the end of the trading session. London’s FTSE 100 index recorded its sharpest one-day point decline since late June, falling 2.4%, while in France and Germany the stock indexes fell 2.6% and 1.9% respectively. The commotion in Europe was one factor tugging down stocks in the U.S., where the Dow Jones Industrial Average dropped 1.6%.

U.S. Treasury Secretary Timothy Geithner said Europe learned painful lessons from its slow response to the crisis that convulsed Greece earlier this year.

“The lessons of that experience…is you want to do this quickly and decisively and not wait,” he said, though he declined to offer specific views about Ireland’s predicament.

The EU can’t provide help unless Ireland asks for it, and negotiations looked set to continue into a second day of meetings Wednesday. Among the sticking points: Ireland is reluctant to surrender its own economic planning to the IMF, while several countries are making strict IMF oversight a condition of their help.
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Europe left little doubt, though, that it is ready to jump in. At a news conference late Tuesday after the meeting broke up, EU economy commissioner Olli Rehn spoke of “intensifying preparations for a potential program.” Klaus Regling, chief of the new euro-zone bailout agency, said he could deliver “substantial” funds “within days.”

A team of experts from the IMF, the European Central Bank and the European Commission will travel to Dublin this week to delve into details of its banking system. Mr. Lenihan said “intensive, focused talks will now take place.”

Mr. Lenihan and other ministers said that the focus of concern was not Ireland’s budget deficits, but its banks.

There is wide concern in Brussels and in many European capitals that Ireland’s troubles—if left unchecked—could further unnerve already-skittish bond markets. Because the 16 euro-zone countries, by and large, persistently run deficits, they rely on financial markets to fill those budget gaps.

As Ireland copes with the aftermath of a large property bust, it faces a new wave of emigration but also innovation, as a group of architects band together to create a micro economy. WSJ’s Andy Jordan reports from Dublin.

After the euro-zone bailout of Greece this spring, the currency union established a bailout mechanism made up of €60 billion of loans financed by the EU’s own budget, €440 billion worth of loan guarantees from other euro-zone countries and up to €250 billion from the IMF.

The possible inclusion of the U.K reflects the country’s close relationship with Ireland. Though outside the euro zone, the U.K. is a major Irish trading partner, and its banks have considerable exposure to Ireland’s financial system. In effect, some bailout money to shore up Irish banks would eventually end up flowing to their British creditors.

The U.K. has had no official request for loans from euro-zone members, a person familiar with the matter said.

In Brussels, the ministers are considering various aid options. One would include separate packages earmarked for Ireland’s banks and its public finances. Another possibility is a smaller sum aimed at stabilizing the banking sector alone.

A package of European aid for Irish banks could be worth €45 billion to €50 billion, while a broader package designed to restore confidence in Ireland’s public finances as well could range from €80 billion to €100 billion, an official familiar with the negotiations said.

Irish banks made disastrous property loans during a decade-long boom, and they’ve suffered catastrophic losses in the bust. Ireland has said it will pump €50 billion into its banks, and it is spending billions to buy bad assets.

In any deal, the IMF would likely contribute half as much aid as the EU and U.K. combined. No further decisions on the breakdown of aid contributions have been made, the official said, as ministers debate whether they should act simply to shore up the banking sector or should make a bolder gesture of support for Ireland’s finances.

In Ireland, political leaders who insist they don’t need a bailout are also angling to avoid the stigma of an IMF-directed economic program, if one comes. IMF loans typically come with policy prescriptions and force governments to relinquish a degree of sovereignty to the Washington-based institution.

It appeared unlikely Tuesday that Ireland could dodge the IMF. Before the finance ministers’ meeting, Finnish government officials made clear that they felt Ireland would have to submit to IMF oversight to better ensure any loan is repaid.

Arriving at the meeting in Brussels, the Dutch finance minister drew a line in the sand. “The IMF should be involved, otherwise we will not give any support,” Jan Kees de Jager said.

In Ireland’s parliament Tuesday, Prime Minister Brian Cowen repeated the country had “not applied to any facility,” but allowed that “some people” would like it to apply for aid. “We are prepared to work with our counterparts in the euro area to see in what way we can…normalize market conditions,” he said.
—Stephen Fidler, Neil Shah, Matthew Dalton, Alistair MacDonald and Quentin Fottrell contributedto this article.

* NOVEMBER 17, 2010, 5:13 A.M. ET

Down Day for Asian Markets

By SHRI NAVARATNAM and PUJA RAJEEV in Singapore and V. PHANI KUMAR in Hong Kong

Most Asian stock markets declined Wednesday, with Chinese stocks extending their recent heavy losses on worries Beijing may unveil more tightening measures to restrain prices.

“Today’s transaction volume is a bit smaller given the ongoing concerns over monetary tightening measures, the index may need to take perhaps another week to fully price in another rate hike before we see a meaningful rebound,” said Peng Yunliang, analyst from Shanghai Securities.

Hong Kong’s Hang Seng Index declined 2%, falling for the sixth time in seven sessions and suffering its biggest one-day percentage fall since late June. China’s Shanghai Composite dropped 1.9%, Australia’s S&P/ASX 200 lost 1.6%, South Korea’s Kospi slipped 0.1% and Taiwan’s Taiex gave up 0.7%.

A weakened yen pushed Japanese exporters higher, as the Nikkei Stock Average rose 0.2%. Markets in Malaysia, Singapore, Indonesia and India were closed for a public holiday.

Dow Jones Industrial Average futures were up 33 points in screen trade.

Commodity-linked shares were hit across the region as European sovereign debt troubles reined in risk appetite and pushed the U.S. dollar higher against major global currencies. Copper, zinc, natural rubber and aluminum futures fell sharply on the Shanghai Futures Exchange.

A sharp overnight fall on Wall Street also hurt sentiment.

BHP Billiton dropped 2.2% and Rio Tinto sank 3.2% in Sydney, Mitsubishi Materials lost 4% in Tokyo and Korea Zinc lost 2.9% in Seoul.

In Shanghai, Jiangxi Copper dropped 2.9%, PetroChina and Zijin Mining Group each lost 1.9%, and Datong Coal Industry lost 3%. In Hong Kong, Jiangxi tumbled 8.2% and PetroChina skidded 3.3%.

Selling continued on worries that Beijing could impose price controls, after the state-run Xinhua news agency cited Premier Wen Jiabao as saying China’s Cabinet was drafting measures to curtain sharp increases in prices of commodities that affect people’s immediate interests.

Shares of Cathay Pacific Airways ended 0.4% lower in a downbeat Hong Kong market, but continued to outperform after its positive fiscal-year earnings forecast on Monday.

Newly listed Shirble Department Store Holdings fell 17.7% to 1.81 Hong Kong dollars (23 U.S. cents) on its first day of trading, pressured by poor broad market conditions.

Shares of Macau gaming stocks tumbled after the city’s Chief Executive Fernando Chui Tuesday said the local government will enhance the regulation of the gaming industry. Shares of Sands China tumbled 7.1%, SJM Holdings gave up 6.3% and Wynn Macau lost 4%.

“While some investors immediately interpret it as tightening, we consider this is always consistent with current practice of the government. In fact, the exact same sentence also appeared in last year’s policy address and at the end, the sector has grown 60% year-to-day in 2010,” J.P. Morgan analysts wrote in a note to clients.

In Tokyo, Mazda Motor bucked the market to advance 3.1%, after the Nikkei reported that about 10 firms have decided to buy a large portion of Ford Motor’s 11% stake in the Japanese automaker.

In Sydney, Qantas Airways lost 2.2% as concerns persist about the airline’s technical issues. On Tuesday, a 747 jet en route to Argentina was forced to return to Sydney after problems with the aircraft’s electrical system, the latest in a string of mid-air incidents which have plagued the carrier in recent weeks.

Trading in Seoul was choppy with the market turning positive after persistent selling during much of the morning.

“The Kospi has been hit harder than other global peers, which means with no particular adverse elements, it could also rebound faster than others as well,” said Kim Dong-ha at Kyobo Securities.

In Seoul, Tuesday’s news that Hyundai Group was chosen as the preferred bidder for a controlling stake in Hyundai Engineering & Construction continued to weigh on some stocks, as investors worried Hyundai Group will have to borrow heavily for the acquisition. Hyundai Engineering & Construction lost 4.8% and Hyundai Merchant Marine—an affiliate of Hyundai Group—stumbled 9.6%.

Hyundai Motor, which lost out to Hyundai Group as the preferred bidder, rose 2.8%, on relief that the distraction of the bidding process was now over.

Elsewhere in the region, New Zealand’s NZX 50 fell 0.8% and Philippine shares ended 1.7% lower. In afternoon trading, Thailand’s SET gave up 2.1%.

In foreign-exchange markets, the euro rose against the U.S. dollar after falling to a seven-week low of $1.3446 on Tuesday, amid investor jitters over the simmering euro-zone sovereign debt crisis. The focus remained on fiscally strapped Ireland, as speculation mounted that Dublin would request a bailout, even though Irish officials continued to deny they would.

“A resolution to the Irish debt crisis seemed to grow more distant,” said Mike Jones, a currency strategist at the Bank of New Zealand. “All up, we suspect the backdrop of generalized risk aversion and equity market weakness will keep the U.S. dollar” [supported], he said.

The euro was fetching $1.3502 from $1.3490 late Tuesday in New York, and 112.61 yen from 112.35 yen. The dollar was buying 83.42 yen, from 83.28 yen.

Lead December Japanese government bond futures fell 0.43 at 141.96 points, on profit-taking after Tuesday’s gains. Ten-year cash bond yields were up 2.5 basis points at 1.050%.

Spot gold was at $1,332.60 per troy ounce, down $6.80 from the New York close on Tuesday. December Nymex crude-oil futures gave up 85 cents at $81.49 per barrel on Globex.

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