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Dublin: 7 °C Monday 18 November, 2019
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Markets take a nose dive as bond crisis returns with a bang

Christine Lagarde says there’s a “crisis of confidence”. No kidding: markets are slipping while borrowing costs are back on the up.

ECB president Jean-Claude Trichet has doubled the ECB's purchases in the last week - but the cost of borrowing for Spain and Italy keeps rising.
ECB president Jean-Claude Trichet has doubled the ECB's purchases in the last week - but the cost of borrowing for Spain and Italy keeps rising.
Image: Daniel Roland/AP

IMF MANAGING DIRECTOR Christine Lagarde has admitted there is a “crisis of confidence” among the world’s investors, as stock markets resume their worrying pattern of steady falls, and as the costs of borrowing for governments rises once again.

In an interview with German magazine Der Spiegel, Lagarde said the IMF had undergone massive changes which had “seriously aggravated the situation” in the world’s markets, but said the current circumstances were “different from previous situations and it’s wrong to try to draw comparisons”.

Her comments, published on Sunday, seem quite prescient: in the first day of trading after their publication, European stock markets suffered heavy losses with the FTSE 100 down by 4.7 per cent and Frankfurt’s DAX off by over 5 per cent.  In Dublin, the ISEQ index lost 3.46 per cent.

That pattern has been renewed this morning, with the Nikkei index in Tokyo shedding 2.2 per cent, and Hong Kong’s Hang Seng down by 1.5 per cent.

Perhaps more worryingly, however, the cost of borrowing for many of Europe’s struggling economies has surged once again in recent days, as the impact of the ECB’s bond purchasing programme appears to wane.

The cost of a 10-year loan to the Spanish government is currently at 5.3 per cent – while Italy, which already has a greater mountain of national debt, would pay 5.6 per cent for its own.

Both governments would have paid under 5 per cent for similar loans two weeks ago, when the European Central Bank reactivated its controversial programme of buying bonds in struggling economies.

Data released by the ECB yesterday showed that the central bank had spent €13.3bn on bonds last week – almost exactly double the amount it had spent the week beforehand – as the markets demanded a greater intervention on order to stave off a funding crisis for Spain and Italy.

If the borrowing costs for those two countries rise to an unacceptable level, the two countries will simply be priced out of the markets – and will need to turn to the EU and IMF for emergency funding.

If either country was to need a bailout then the Eurozone’s lending facility, the European Financial Stability Fund, would be almost totally emptied – and mean that struggling countries like Greece, Ireland and Portugal would have to find more cash to contribute to the bailouts for those other countries.

The European Stability Mechanism could require Ireland to pay as much as €11.1bn in order to fund other countries’ bailouts, if such bailouts are not required before the ESM kicks in in 2013.

Read: New bailout deal will reduce debt quicker than expected – ESRI >

More: Bailed-out Ireland could stump up €11.1 billion… to pay for new bailout fund >

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Gavan Reilly

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