EU Faces New Bond Crisis

By Antonio Perez
Antonio Perez
Antonio Perez
November 24, 2010 Updated: October 1, 2015

A person withdrawing money from an ATM in Dublin, Ireland, on November 22. (Peter Muhly/Getty Images)
A person withdrawing money from an ATM in Dublin, Ireland, on November 22. (Peter Muhly/Getty Images)
NEW YORK—A new sovereign debt crisis is brewing in the European Union as Ireland’s deepening fiscal crisis has affected investor confidence in the government bonds of Portugal and Spain.

Over the weekend, Ireland applied for a bailout from the EU and the International Monetary Fund (IMF) and on Wednesday detailed a $15 billion deficit-cutting plan.

Almost immediately, on Tuesday, Standard & Poor’s cut Ireland’s debt rating by two notches from “AA-” to “A,” with a negative outlook to reflect the increasing uncertainty over the nation’s bonds. The ratings cut had a negative effect on neighboring countries.

Irish stocks fell broadly on Wednesday, especially the banking sector. The Bank of Ireland Plc, the nation’s biggest lender, plunged for a third straight day, and investors worry that it may come under government ownership in the near future. Shares of the bank were down 25 percent on Wednesday afternoon. Second-biggest lender Allied Irish Banks Plc also fell.

Ireland’s woes are affecting the bond yields—or the amount of return investors demand on a bond—of Portugal and Spain, speculating that these nations may need a similar bailout as a result of a widening European debt crisis. As bond yields rise, bond prices typically fall.

According to Bloomberg data, on Wednesday afternoon the spread, or difference, in yields between Portuguese 10-year bonds and German 10-year bonds widened to almost 500 basis points (1 percent equals 100 basis points). Similarly, spreads between Spanish and German bonds increased to 240 basis points. Germany is the credit benchmark for the EU.

Public sector workers in Portugal took to the streets on Wednesday in a strike to protest austerity measures enacted by the government.