European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts.

European finance chiefs ended crisis talks in Brussels on Sunday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.
The first test of the twin decisions came as markets resumed trading after speculation intensified last week that Portugal and perhaps even Spain will require support. German bunds, Europe’s benchmark, fell after the deals damped demand for the safest fixed-income assets. European stocks gained.
“We’ll maybe see some relief in markets, but governments need to show they’re getting their economies in shape,” said Axel Merk, president and chief investment officer of Merk Investments LLC in Palo Alto, California. “People are now going to focus on Portugal and it’s probably also going to need some help.”
Six months after the Greek rescue exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency union, policy makers again found themselves meeting on a Sunday racing to calm markets. They convened after a week in which the cost of insuring Portuguese, Irish and Spanish government debt against default rose to a record and the 10-year bond yields of those nations, Italy and Greece averaged more than 7.5 percent, a euro-era record.
--------------Greek extension
In a third move on Sunday, Greece was told it could have an extra four-and-a-half years to repay emergency loans totaling 110 billion euros to match the seven-year term under Ireland’s deal.
The euro was little changed against the dollar in early European trading having weakened 3.2 percent last week. The yield on the 10-year German bund rose three basis points to 2.78 percent as of 9:10 a.m. in London, the highest since July 28. The extra yield investors demand to hold Irish debt narrowed.
The Irish yield premium over benchmark 10-year German bonds fell 9 basis points 637 basis points on Monday. It reached a record 656 basis points on Nov. 26, almost triple the spread just four months ago. Spain’s yield spread slipped 3 basis to 241 basis points and Portugal’s declined by 6 to 419.
-----------German push
Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts and cut the value of bond holdings.
The German push ran into criticism from policy makers elsewhere, who called it mistimed, and from European Central Bank President Jean-Claude Trichet, who warned it would unsettle bondholders. Merkel, who has faced domestic criticism for aiding EU neighbors, on Sunday backed away from the pitch for an automatic penalty, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis.
The new proposal, fast-tracked from a debate set for December, would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.
Trichet on Sunday called the compromise a “useful clarification” and the ECB’s Governing Council said in a statement that the Irish program will “contribute to restoring confidence and safeguarding financial stability in the euro area.”
-----------------‘Herd behavior’
“There’s plenty of herd behavior in the market,” EU Economic and Monetary Affairs Commissioner Olli Rehn said. “We want to clarify any possible confusion.”
Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting expansion of 3.7 percent this year, the fastest pace in more than a decade. That resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.
Sunday’s decisions bring “hope of preventing contagion spreading to other countries but do not address long-term solvency issues,” said Andrew Bosomworth, a Munich-based fund manager at Pacific Investment Management Co. “It’s a kick-the- can-down-the-road solution as opposed to acknowledging and confronting the here-and-now insolvency problems.”
------------------Cost of rescue
Ireland said it will pay average interest of 5.8 percent on the loans, which break down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.
“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.
A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.
Including the bill for propping up Irish banks, the deficit is set to reach 32 percent of GDP this year, the highest in the euro’s 12-year history.
Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment near 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants elections in January, his party last week lost a special election for a vacant parliamentary seat and some of his own colleagues are slamming his leadership.
(Source: Bloomberg)