Irish Crisis Domino Effect Concerns Increase Risk Aversion

The Greenback's notable strength last week against the other major currencies was due in large part to the European financial crisis that was dealt yet another blow by the most recent Irish bailout request from the IMF and European Union.

Nevertheless, the financial markets cannot seem to stop themselves from worrying about yet another potential financial crisis, with the focus now shifting toward either Portugal or Spain to be the next financially troubled European country humbled into accepting bailout money.

Nevertheless, each successive bailout seems harder to get the approval of the more fiscally responsible Germans, who seem to feel that the bond holders should pay the price for buying high yield debt from the more financially troubled EU members.

Irish Financial Crisis Prompts Risk Aversion

The financial troubles in Europe added substantially to the U.S. Dollar's dramatic rise last week. The concerns initially solidified with the Irish financial crisis and then started spreading into worries over the financial situation of other European member states like Spain and Portugal.

The financial crisis in Ireland began causing concerns the previous week when a London clearing house - LCH.Clearnet - raised margins on Irish bonds to between 15 and 30 percent. By the end of the week, the Irish government had agreed to a joint EU/IMF bailout program, which is currently estimated to be between 80 and 100 Billion Euros.

Last Monday, Moody's Investor Services warned the markets that it might have to make a multiple notch downgrade for Irish debt. The rating agency noted that the rescue package from the EU and the IMF would, "crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign's debt burden."

The currency market basically interpreted this as a signal to buy U.S. Dollars against the other major currencies, especially other European currencies. As a result, the Euro declined by -3.3 percent last week, while the British Pounds lost -2.5 percent on the week.

The commodity currencies were also lower, with the New Zealand Dollar dropping a whopping -3.6 percent, while the Australian Dollar shed -2.2 percent. The Canadian Dollar - last week's best performer against the Greenback - dropped a mere -0.2 percent and was least affected by the financial crisis in Europe.

Domino Effect May See Portugal and Spain Next in Line

In addition to the Irish financial crisis, concerns arose over the financial position of other troubled members of the European Union such as Portugal - who is rumored to be the next troubled economy in line for a rescue package from the EU and IMF.

Earlier in the week, Portuguese Prime Minister José Sócrates stated that

"Portugal doesn't need anyone's help and will solve its own problems."

Sócrates also stated that Portugal had a clear strategy to bring down its massive deficit and that the Irish rescue had "no connection" to the situation in Portugal.

Spain was also mentioned as a bailout candidate, but it managed to sell 3.26B Euros in Treasury bills last week, although this was on the lower end of the estimated 3-4B Euros that the debt auction was expected to raise.

In Spain, Spanish Finance Minister Elena Salgado stated that,

"Spain is doing everything it has promised to do, with tangible results"

When asked whether Spain would need a bailout from the European Union, Salgado answered, "Absolutely not".

Despite the relatively optimistic comments made by Salgado and Socrates, Portuguese bonds surged last week to 6.9 percent. This pretty much mirrored the sharp yield rise that Greek and Irish bonds demonstrated just before going to the EU to request a bailout.

In addition, the spread between 10 year Spanish bonds and German Bunds hit a post EMU record of 233 basis points over the Bunds, achieving a yield of 4.87 percent on the Spanish bonds.

Nevertheless, according to some analysts, Spain is too big to bail out. They argue that the size of any meaningful rescue package for Spain is likely to use up all of the available EU funds.

Such a situation could seriously destabilize the European Union during this crisis period since Germany seems increasingly less supportive when it comes to bailing out less fiscally responsible EU countries.