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News : EU Economy Last Updated: Mar 10, 2011 - 3:56 PM

Moody's downgrades Spain; Borrowing costs of debt of Ireland, Portugal and Greece hit euro period record highs; Opposition to bailouts growing in so-called 'core' countries
By Michael Hennigan, Founder and Editor of Finfacts
Mar 10, 2011 - 6:45 AM

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10-year bond yields over 12 months: from top; Greece, Ireland, Portugal, Spain Source: Bloomberg

The credit ratings agency Moody's, downgraded Spain's sovereign debt on Thursday. On Wednesday, borrowing costs of  debt issued by Ireland, Portugal  and Greece hit euro period record highs. Meanwhile, opposition to bailouts of peripheral economies is growing  in so-called 'core' countries.

Portugal’s Treasury and Government Debt Agency on Wednesday sold the maximum planned €1bn worth of  2-year sovereign bonds but it was at a steep yield.

The €750m to €1bn auction of the 5.45% September 2013 bond was closely watched as Portugal struggles to avoid a bailout.

The average yield of 5.993% was down from recent levels on the secondary market but compared with the 4.086% level set at the previous auction.

The yield on 10-year bonds on Wednesday rose to  5.51% for Spain; 7.63% for Portugal, 9.58% for Ireland and 12.90% for Greece.

When the market price of a bond with a fixed interest rate falls, its yield rises.

The Financial Times says that the rise in 10-year yields for the  peripheral Eurozone countries has been inexorable over the past five months. Italy has seen a jump of 1.3 percentage points, Spain 1.5 percentage points and Portugal 2 percentage points. Greece and Ireland, have seen rises of almost 4 percentage points.

Moody’s Investors Service downgraded Spanish debt by one notch to Aa2 from Aa1 on Thursday morning. The outlook on the Aa2 ratings rated as negative.

Moody’s said it moved because of the expectation that “the eventual cost of bank restructuring will exceed the government’s current assumptions, leading to a further increase in the public debt ratio,” according to a statement.

Moody’s said it has “continued concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances.”

Spain raised €4bn in 15-year bonds on Tuesday and Portugal has issued nearly €7bn in sovereign debt in 2011, or around 35% of this year's total funding needs.

US investment bank Morgan Stanley said earlier this week on Spain: "Our core views have not changed, i.e., Spain is still dealing with balance sheet repair and looking for a new growth engine - - unlike most of its European neighbours. This process of rebalancing away from domestic demand and towards foreign demand is necessary and welcome. But, as long as it continues, we think that economic growth is unlikely to accelerate meaningfully - especially this year.

Yet, while we still think that a quick turnaround story is unlikely to unfold, the consensus view is now too pessimistic on the Spanish economy, in our opinion. The latest published economists' polls point to growth of around 0.6% in 2011. We expect almost twice as much - and a pace of expansion of 1.5% in 2012. But that's not even half the rate of growth seen during the decade prior to the financial crisis, and it's far below government expectations."

In a feature today, the FT highlights the political backlash in countries such as Germany, the Netheralnds and Finland to financial support for the stricken economies in the currency union.

The newspaper says the political party, True Finns, is within striking distance of becoming Finland’s largest bloc in national elections on April 17th - -  using a potent mix of economic populism and anger at recent EU bailouts

True Finns' leader, Timo Soini, would likely find many counterparts among the Irish bbb - - burning bondholders' brigade - - and vice-versa.

Economic populists can take strong but contrary positions depending on the vantage point - - some no doubt are of strong conviction but would also be so, in changed circumstances where the boot was on the other foot.

Rational critics have tended to lament the 'jellyfish' politicians who have failed the test of leadership in critical times.

It's also a test of leadership to avoid boosting support for extremist parties that promote ethnic discord.

Finfacts has argued that countries like Ireland have to show a serious commitment to reform of failed systems. It would be both helping itself and also showing to other countries that it is prepared for necessary change.     

We have made a start with the new government.

It has been clear that the new Dutch government has taken a more severe position on support for periphery countries than Germany.

We need to build alliances in Europe by looking forward;  former Taoiseach John Bruton's apportioning of blame for the bubble has its place but at this stage, this focus will be no help to Ireland as it would only provide fuel for the likes of Timo Soini.

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