UPDATE: Euro Strengthens, Stocks Decline On Irish Bailout

The European common currency continue to strengthen vs the Dollar while European stocks turns negative after a short rally as a reaction to Sunday’s news of another EU bailout. Here are the comments and updates from some of the leading Nordic and European analysts.

“It’s probably a question of when the next problem will occur, rather than whether there will be one.”

Jim Reid

Prime minister Brian Cowen & Finance minister Brian Lenihan

European stock markets responded positively on Monday to news that Ireland has applied for a rescue package in an effort to safeguard financial stability, but earlier gains were pared back as the market awaited more details of the plan. The euro seems to be following the same pattern.

The Stoxx Europe 600 index is now down by 0.5%, after hitting an intraday high of 271.68 Monday morning. The index posted a loss of 0.3% last week.

Stocks across Europe were already turning negative when Moody’s Investors Service announced a review of Ireland’s Aa2 rating would likely result in a “multi-notch downgrade.”

Moody’s says in a statement that a package of financial aid for Ireland will help standalone credit quality of banks but that it would underline bank-contingent liabilities for the government and weigh on its sovereign debt burden.

Moody’s Investor Service.

Late Sunday, the Irish government formally applied for aid from the European Union, which welcome the request.

The International Monetary Fund says it stands ready to join the support program, including through a multi-year loan.

Here’s a copy of the statement by the Government of Ireland.

Here’s a copy of the statement by the EU officials.

No specific number has been given, but Irish Finance Minister Brian Lenihan says, according to media reports, that it would be less than 100 billion euros ($136.7 billion).

The troubled state of the Irish banking sector had made a bailout deal seem all but inevitable in recent days.

Video report by Reuters:

Vodpod videos no longer available.

(Ireland to accept EU, IMF bailout, posted with vodpod)

Irish Financial Stocks Drop

However, Irish financial stocks came under heavy selling pressure after Prime Minister Brian Cowen on Sunday said they would need to become smaller as part of the bailout.

He also said they may need to raise more capital.

“The good news for banks is that they have a bit more to go on, but for them, because of the support structure in terms of that, it looks as if there’s a fair chance they will further dilute shareholders,” Bernard McAlinden, strategist with NCB Stockbrokers, says according to MarketWatch.com.

Shares of Bank of Ireland has dropped 16,8% this morning, while Allied Irish Banks PLC is down -1.15%.

Irish Life & Permanent Group Holdings PLC is tumbling down more than 20%.

“As long as no one else needs a bailout, the market gets relief from here,” McAlinden says.

“A restructuring of the banks seems obvious as well as tighten fiscal policy. New stress tests of the banks are likely to be included as part of the plan as the tests undertaken this summer did not prove sufficient. However, the Irish authorities claim the low corporate tax for foreign companies is not part of the deal. In addition the four-year fiscal is likely to be even tighter than planned,” senior economist Knut Magnussen at DnB NOR Markets points out.

Here’s a copy of today’s Morning Report from DnB NOR Markets.

Who’s Next?

The market turbulence triggered by worries over Ireland had started to spill over in recent days to other high-deficit countries like Portugal and Spain.

Jim Reid, strategist at Deutsche Bank, says it’s probably, though, “a question of when the next problem will occur, rather than whether there will be one.”

“A band-aid solution will take the immediate pressure off from the peripheral risk complex but will not permanently resolve the more fundamental issues of the highly leveraged western financial system,” Reid writes in a note to clients.

“So with Ireland having now joined Greece in the ‘kick the can down the road’ drill, which bails out bondholders at the expense of the Irish tax-payers, markets are likely to turn the attention to the next of the PIIGS. Portugal needs to roll over more than EUR 10 billion of sovereign debt in the first half of 2011 and thus looks more or less like a sitting duck,” market strategist Christian Tegllund at Saxo Bank writes in his Wake-up Call Monday morning.

Here’s a copy of the latest macro analysis from Saxo Bank.

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