Monday, 22 Nov 2010

EUR Struggling Under Fear of Debt Contagion

The euro slumped on Monday as worries about how a bailout of Ireland will be implemented doused earlier investor optimism and failed to ease fears about the finances of other indebted euro zone countries.

The euro, which hitt a one-week high near $1.38 overnight directly after the European Union and International Monetary Fund agreed to a rescue, swiftly surrendered gains.

Investors also feared aid, which an EU source said could total 80 billion to 90 billion euros, may not be enough to backstop Irish banks or stop similar runs on assets in heavily indebted Portugal or Spain. Portugal's debt burden is rooted in slow growth and an increasingly uncompetitive economy.

Ireland is putting the finishing touches on a 15-billion-euro austerity plan, and the EU/IMF rescue will shore up a banking sector devastated by a housing collapse without Ireland having to borrow at extremely high rates on capital markets. Still, ratings agency Moody's said Monday a "multi-notch downgrade" on Ireland was now likely.