Euro slide proceeds as Irish debt worries persist

25 Nov 2010

The euro has continued its slide in opposition to the dollar as investors digest the Irish Republics austerity prepare.

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The currency fell by more than half a cent to 1.3314, and has now fallen by more than three cents this week.

The four-year Irish prepare is made to save lots of 15bn euros (20bn, 13bn) via investing cuts and tax rises, but investors stay unconvinced.

The government is also negotiating a bail-out package using the European Union and International Monetary Fund.

This is anticipated to be well worth about 85bn euros.
Investor worry

The austerity measures are made to scale back the Republics spending budget deficit, that is the highest from the eurozone.

Having said that, youll find doubts about the Irish governments development estimates, which right impression its deficit forecasts - several investors see them as overly-optimistic.

The government nevertheless expects the financial system to normal 2-2.5% development in 2011, and 3.5-4.5% the yr right after, whereas ranking company Typical & Poors has said it expects virtually no development over the next two years.

There also are also doubts about the whether the government will be able to push via its austerity measures when parliament votes on the spending budget on 7 December.

Compounding this uncertainty are fears that the Irish financial debt crisis will spread to other countries with high deficits, in particular Portugal and Spain.

All these factors are putting pressure on the euro.

Irish government bond yields have also risen further, suggesting investor confidence from the countrys financial system has slipped since the recovery prepare was announced.

Yields on Spanish government financial debt have also risen.

Having said that, those on Portuguese financial debt were unchanged, as were those on bonds issued by Belgium, the latest country to be linked with potential financial debt problems.
Tax rises

In total, the investing cuts announced from the recovery prepare will amount to 10bn euros, while tax rises will bring in a further 5bn euros.

The cuts include 2.8bn euros of savings in social welfare investing, 24,750 public sector jobs cuts and a one euro reduction from the minimum wage, to 7.65 euros an hour.

The tax rises include an extra one.9bn euros from income tax changes, an increase in VAT from 21% to 22% in 2013, and to 24% in 2014, and a new ’site value’ property tax to raise 200 euros from most homeowners by 2014.

The government has already implemented 15bn euros of cuts from the last two years.

The measures have proved deeply unpopular using the electorate, and junior government partner, the Green Party, has called for a general election in January.

Voters go to the polls later in a by-election in Donegal to elect a new TD (MP) to the Irish Parliament.
Increased support

Opposition politicians are questioning the governments handling of the financial system, and in particular its continued denial last week that it would need financial assistance to help solve the countrys financial debt crisis.

Despite the denials, the government asked for assistance at the weekend and is currently in negotiations using the EU and IMF over a bail-out package anticipated to be about 85bn euros.

The government has described the package as ‘an overdraft facility’ that it can draw upon when needed.

Much of the money for the bail-out will come from the European Stability Fund.

European Central Bank council member Axel Weber said late on Wednesday that the fund could be increased if needed.


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