Important developments today:
1. Ireland reaches agreement on EU/IMF bailout deal, markets remain unconvinced
2. Consumer confidence less downbeat in Euro area
Ireland reaches agreement on EU/IMF bailout deal, markets remain unconvinced. Ireland has accepted the bail-out package (expected to be worth between €80 and €90 billion, or as much as 60% of gross domestic product) from the European Union and International Monetary Fund, becoming the second euro-zone country to seek a rescue after Greece. The deal is aimed at preventing problems facing the Irish banking system from spreads through other indebted countries of the bloc. Ireland will tap the €750 billon European Financial Stability arranged in May after Greece needed the €110 billion financial aid from the EU/IMF (which was the equivalent of 47% of its GDP). It is estimated that a third of the bail-out money will be used for shoring up the Irish banking system.
Market reaction to Irish bailout has been mute, as investors remained worried that the agreement won’t dispel longer-term concerns over crushing debt burdens of other euro nations. Indeed, many analysts speculate that Portugal, seen as the next weakest link among the EU’s highly-indebted countries, might require similar aid packages in near future. Even after Greece received a financial bailout, European stocks and the euro retreated, reversing an earlier gain. The spread between German and Irish 10-year bonds widened two basis points (bps) to 544 bps, while credit-default swaps tied to Portugal government bonds rose 29.5 bps to a one-week high of 447 bps, the largest increase in almost two months.
Consumer confidence less downbeat in Euro area. In a report released by the European Commission today, consumer confidence in the euro area is observed to have improved slightly in November. Though consumer confidence is still negative, it rose from -10.9 in October to -9.5 in November for the overall euro area. The breakdown by country is however yet to be released, and is most likely to paint a mixed picture. In general consumer confidence is likely to be stronger in member countries with improving employment situations and deteriorating in member countries most affected by the recent re-emergence of sovereign debt concerns in the euro area. However, the overall rise in consumer confidence in the euro area bodes well for consumer spending and retail sales [see Chart at http://gem or http://www.worldbank.org/gem].
Source: World Bank Prospects Group and Thomson Reuters.
Among emerging markets
In East Asia and the Pacific, Malaysia's real GDP growth slowed to 5.3% (y/y) in Q3 2010, after expansion rates of 10.1% and 8.9% in the first two quarters. The slower pace of growth is in line with moderation in Asia, and the central bank announced no plans to lower interest rates in the near term.
Thailand's economy expanded 6.7% (y/y) in Q3 2010, after a blistering pace of expansion in the first (12%) and second (9.2%) quarters. In seasonally adjusted q/q terms the economy contracted 0.2% as a result of poor crop harvest.
In South Asia, Sri Lanka's government announced an ambitious 2011 budget today. The government plans to reduce the deficit from 8% (planned) in 2010 to 6.8% by 2011, the lowest deficit level in 19 years. The budget relies largely on larger revenues under a modified tax regime.