After Irish humiliation, markets struggle with eurozone risk

(LONDON) - Financial markets gave the debt rescue for Ireland and new rules for future bailouts a wobbly reception on Monday, and pressure on Portugal and critical eurozone member Spain rose.

In Ireland, people woke to a new era of humiliation and a terrible hangover from a decade of bank-driven bingeing on property.

For the Irish people, the problem now is how to pay the debt and loans, for financial markets the uncertainty is how to price the risk of funding eurozone governments in trouble in future as announcements on Sunday made clear the rules will change.

At ING bank, analysts said that the first reaction of the debt market "was positive."

But by mid-morning the borrowing rates for Ireland, Portugal and Spain had risen from the levels late on Friday, implying that the risk of crisis contagion was high and rising.

There is widespread concern that if the cost of borrowing for Spain becomes prohibitive, Spain will need financial help that the European Union might struggle to provide.

Spain says it is a totally different case from the two eurozone countries rescued so far, Greece and Ireland, and will not need a rescue.

The euro fell, but shares firmed although this was largely in response to signs last week that the US economy is on the mend and the German economy is recovering strongly.

ING analysts noted that pressure from Germany for private investors to share the cost of future bailouts, a factor behind huge uncertainty and tension over eurozone debt in the last two weeks, had been "watered down over the weekend."

But from 2013 governments would be able to renegotiate terms with savers who had lent them money if they ran into trouble.

Analysts at ING and at Goldman Sachs bank noted that the terms of the Irish rescue did not require people who had financed existing debt to take a "haircut," meaning to be repaid less than the full amount when the loans expire.

In Ireland, the public and media reaction to the weekend's events was one of anger, humiliation and alarm at use of the national pension reserve fund to help shore up the nation's finances.

The Irish Sun newspaper summed up the general mood: The rescue, it said, "sentences us all to generations of horrific debt."

It said: "It is pure fantasy to think the Irish people can afford to pay this bill. The taxpayer is being saddled with all the pain, while the bondholders get off scot free."

But the rate Ireland must pay to borrow for 10 years rose to 9.137 percent from 8.877 percent late on Friday, the rate for Portugal rose to 6.971 percent from 6.690 percent and for Spain to 5.203 percent 5.148 percent

In Paris, French Finance Minister Christine Lagarde assured that the rescue totalling 85 billion euros (113 billion dollars) for Ireland would "douse the fire" threatening other eurozone countries, and strongly rejected any suggestion that France might be threatened.

The head of the French central bank, Christian Noyer who is also a decision maker at European central Bank, said in Tokyo he had "absolutely no doubt that this plan will work."

But at French bank Credit Agricole in Tokyo, Mitul Kotecha said the euro had fallen in a "stark" initial reaction, and at MF Global in Tokyo, Nicholas Smith said: "The one to really watch is Spain."

At BNP Paribas bank, analysts said: "As now Ireland had found aid, Portugal and Spain will obviously remain under the spotlight."

However, they said: "We believe that Portugal, despite the ambitious targets contained in the 2011 budget, will probably be forced to resort to the EFSF (EU-IMF rescue fund expiring in 2013).

"Our central case is that Spain will be able to continue to fund itself on the market, albeit at a higher cost."

A statement by eurozone finance ministers on Sunday on the creation of a future permanent European Stability Mechanism "points clearly" to governments coming before private investors in funding debt.

Goldman Sachs analysts said they expected the rescue to relieve some of the pressure against Ireland.

They also said they estimated that the "risk premium on Italian and Spanish bonds -- the larger EMU (eurozone) non-core countries -- already largely discount" the tensions of new conditions emerging for eurozone debt markets.

But they warned: "The ECB faces a serious dilemma on Thursday because they have indicated that they'll spell out their next strategy on that occasion."

They said: "It is worth bearing in mind that more than three quarters of eurozone government liabilities (debts) ... are held by eurozone members, primarily financial institutions.

"Moreover, the ECB has already purchased around 17 percent of the combined debt stock of Greece, Ireland and Portugal. The share of public debt of the former two in public sector hands will likely exceed 50 percent by mid-2013."