Europe navigates between alarm, hope on economy

(PARIS) - Europe confronted ominous new bond market pressures on Tuesday and braced for massive public protests against spending cuts, dampening the economic landscape despite signs of strength in Germany and Britain.

In Europe on Tuesday long-term yields on Irish and Portuguese sovereign bonds soared to the highest levels since 1997 and sent fresh warning signals about overspending and public debt in the eurozone.

"While the underlying macro picture in the eurozone looks increasingly resilient and reassuring, the risk of accidents in financial and sovereign debt markets remains uncomfortably high, with Ireland and Portugal in the limelight," Unicredit economist Marco Annunziata said.

The yield on the 10-year Irish sovereign rose at one point to 6.786 percent and Portuguese rate to 6.654 percent, levels last seen in the second quarter of 1997.

The spread, or differential, with the eurozone's benchmark 10-year German Bund also widened, indicating increased investor unease.

To borrow money on the bond market, the Irish and Portuguese governments must now offer interest rates more than 4.0 percentage points higher than those offered by Berlin.

Ireland and Portugal are both struggling to contain huge public debts and deficits, with the former staring at a possible credit downgrade and the latter in the throes of a political battle over the budget.

The Irish government is having to rescue one of the country's leading lenders, Anglo Irish Bank, with press reports suggesting it could cost between 28 billion and 29 billion euros and with some estimates putting the figure at 40 billion euros (54 billion dollars).

Irish Prime Minister Brian Cowen attempted to reassure nervous financial markets the government would soon present a "manageable" plan to bail out the bank.

"The government has shown consistently our preparedness to do what is necessary to ensure there is international confidence in the direction in which the economy is taking," Cowen told reporters in Dublin.

"As the governor of the Central Bank has said, we believe that we can provide a manageable way forward for that bank, about how that will be dealt with over the longer term."

The Socialist government in Portugal is meanwhile grappling with parliamentary opposition to its 2011 budget following a breakdown in negotiations with the center-right Social Democrats.

But there are acute social tensions elsewhere in Europe, mainly over proposals for tax rises and spending cuts from governments left and right trying to stabilise public finances.

Labour leaders have called on workers across the continent to mobilise on Wednesday to protest against what are seen as harsh austerity plans which unjustly penalise working people.

Brussels, the seat of the European Union, is set for its largest Europe-wide protest for a decade, with organisers planning to assemble 100,000 people from 30 countries to say "No to austerity!"

"This is a crucial day for Europe," said John Monks, secretary general of the European Trade Union Confederation, "because our governments, virtually all of them, are about to embark on solid cuts in public expenditures."

"They're doing this at a time where the economy is very close to recession, and almost certainly you'll see the economy go back into recession as the effect of these cuts take place."

The French government for example was beginning two days of budget announcements expected to include reductions in social welfare spending, notably through planned pension reform that has already brought millions of people into the street to demand its cancellation.

But in the midst of the turmoil on Tuesday, a new poll showed that consumer and business confidence in Germany were at three-year high points, possibly presaging a robust rebound for the eurozone's biggest economy.