Markets fall after Irish Republic 85bn euro bail-out

A money changer employee changes Euro and US Dollars on an exchange kiosk The euro has been falling against the dollar

The euro has fallen against the dollar and major European markets have dropped sharply, a day after ministers agreed a bail-out for the Irish Republic.

On Sunday, European ministers reached agreement over a bail-out worth about 85bn euros ($113bn; £72bn).

On Monday, the euro fell 1.4% to $1.309, a new two-month low.

And Irish, Spanish and Portuguese bond yields remained stubbornly high, indicating the market is not convinced European debt problems have gone away.

The leading European indexes all closed more than 2% lower.

The euro also fell against the pound, to 84.15p, its weakest since late September.

Greek debt

Irish Prime Minister Brian Cowen had called the 85bn euros package the "best available deal for Ireland", but opposition politicians had their doubts.

"This is a hugely disappointing result for the country. It's hard to imagine how this deal could have been much worse," said Fine Gael finance spokesman Michael Noonan.

Start Quote

The focus is now on Portugal and Spain. Markets are taking a view that it is a question of when, not if, they have to go for some sort of bail-out”

End Quote David Jones IG Index

"People are right to feel frightened, and worried about the future, when our own government has sold out the country on such lousy terms."

Also on Monday, the European Commission said the Irish Republic, which will have the biggest budget gap in the EU of 32% this year because of the cost of supporting its banking sector, will reduce the shortfall to 10.3% next year and cut it further to 9.1% in 2012.

However, for 2011 it has kept its forecast unchanged at 1.5%, down from 1.7% for 2010.

At the same time, eurozone finance ministers have opened the way to a six-year extension to 2021 in the repayment period for a European Union and International Monetary Fund loan to Greece.

It would mean an increase in the interest rate charged to Greece, but the rate would not exceed the 5.8% rate the Republic of Ireland is paying for its bail-out.

The BBC's Europe editor Gavin Hewitt said this was another sign that the reality for countries like Greece and Ireland was "years of increasing debt and austerity".

Bank shares up

At the close of trade in London, the FTSE 100 was 2.1% down. Germany and France declined even more, with Frankfurt's Dax down by 2.2% and Paris's Cac 40 down by 2.5%.

Market Data

Last Updated at 18:11 ET

Market index Current value Trend Variation % variation
Dow Jones 16461.32 Down -153.49 -0.92%
Nasdaq 4382.85 Down -36.63 -0.83%
S&P 500 1927.11 Down -14.17 -0.73%
FTSE 100 6399.73 Up 27.40 0.43%
Dax 8940.14 Up 53.18 0.60%
BBC Global 30 7325.76 Up 48.89 0.67%

Analysts suggested these falls, along with rising bond yields, reflected the persistent concerns in the markets about European debt levels, despite the Irish deal.

"Markets do not think this is going to draw a line under the problems," IG Index's David Jones told BBC News.

"The focus is now on Portugal and Spain. Markets are taking a view that it is a question of when, not if, they have to go for some sort of bail-out."

Portuguese and Spanish Bond yields continued to rise throughout the day, indicating those heightened concerns about their ability to be able to pay back their debts.

And the cost of insuring Portuguese and Spanish debt against default rose to a record high on Monday.

But Germany's finance minister Wolfgang Schaeuble attacked market speculation over the financial woes of Portugal as "irrational".

At the same time he praised the rescue deal for the Irish Republic.

"The speculation on the international financial markets can barely be explained rationally," he told German radio station Deutschlandfunk.

Countries are put under pressure, leading to "fear effects," he said, adding "the markets can make a lot of money in this way."

And French Finance Minister Christine Lagarde said the bail-out was "sufficient" and that "irrational" markets were not correctly pricing the sovereign debt situation in Europe.

"The amount [of the bail-out] is sufficient because that will keep Ireland afloat for three years," she told RTL radio.

'Best available deal'

Start Quote

Europe's leaders, who have recently added a tone of desperation in their comments about the euro's future, have taken refuge in the long game while hoping that something turns up that enables countries such as Ireland and Greece to reduce their debts”

End Quote

France and Germany have also said the Republic of Ireland bail-out should draw a line under its debt crisis.

And they have expressed confidence in Portugal's ability to correct its finances and avoid needing outside help.

An average interest rate of 5.8% will be payable on the loans, above the 5.2% currently paid by Greece for its bail-out.

Irish Prime Minister Brian Cowen said it was the "best available deal for Ireland".

It provides "vital time and space to successfully and conclusively address the problems we've been dealing with since the financial crisis began", he said.

He also said the country would take 10bn euros immediately to boost the capital reserves of its state-backed banks.

Another 25bn would remain in reserve, earmarked for the banks.

The Irish government has also said that interest payments on all state debt will account for more than 20% of tax revenues in 2014.

The deal does not require the Republic to change its low 12.5% corporation tax.

'Appalling'

But as part of the bail-out, the Irish government will have to make an unexpected contribution of 17.5bn euros towards the 85bn euros total.

Dublin is poised to use its national pension fund and other cash reserves to achieve this.

Opposition parties Fine Gael, Labour and Sinn Fein have attacked this, and other elements, of the bail-out.

Main opposition party Fine Gael called the agreement "appalling", saying the 5.8% annual interest rate on the loan was unaffordable.

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