Irish Prime Minister Brian Cowen said he is working with fellow European leaders as his nation’s sovereign debt crisis threatens the stability of European markets.
While reiterating that his debt-strapped country has not sought to tap an EU rescue fund, Cowen told reporters today that “there are issues affecting the wider euro area of which we are a member” and that he and his counterparts were working to “ensure that the bond markets respond positively to the euro.”
Irish bonds rose from a record low today, gaining for the first time in 14 days as traders bet a bailout was near. European governments sought to calm investor concerns, saying they won’t be forced to share the cost of a rescue. Irish Finance Minister Brian Lenihan nevertheless said in an interview with RTE Radio it “makes no sense” to request help as the government is fully funded to mid-2011.
“It seems difficult for Ireland to avoid tapping the fund unless they have new rabbits to pull out their hat,” said Julian Callow, chief European economist at Barclays Capital in London.
It is very likely Ireland will seek support from the 750- billion-euro ($1 trillion) fund, Reuters reported, citing euro- zone sources it didn’t name. The Finance Ministry in Dublin denied talks were under way. Amelia Torres, a spokeswoman for the EU’s Economic and Monetary Affairs Commissioner Olli Rehn, called the report “pure speculation.”
Luxembourg Prime Minister Jean-Claude Juncker, who chairs the panel of euro-area finance ministers, said there was “no immediate reason” to think Ireland will request cash and that officials would not meet before regular monthly talks in Brussels next week.
The premium that investors demand to hold Irish 10-year sovereign bonds over the benchmark German bonds was 564 basis points at 3:59 p.m. in London, down from a record 646 points yesterday.
Yields on bonds of Spain and Portugal jumped earlier in the week amid concern that fallout from Ireland would spread. The extra yield that investors demand to hold Portuguese 10-year bonds instead of German bunds climbed to a record 484 basis points on Nov. 11. The Spanish 10-year bond snapped a 13-day drop on Nov. 12, matching the longest run of declines since Bloomberg began collecting the data in 1993.
A decision by Ireland to use the European Financial Stability Facility would be a “circuit breaker” for the market turmoil and boost the euro, Emma Lawson, a Hong Kong-based currency strategist at Morgan Stanley, said in a report today.
Ireland’s woes formed part of the debate at the Seoul summit of Group of 20 leaders, from which the finance chiefs of Germany, France, the U.K., Spain and Italy said the crisis- resolution program now being debated to have investors cover future bailout costs would have “no impact whatsoever” on existing debt.
The drafting of the post-2013 crisis plans hasn’t “been helpful,” Cowen said in an interview with the Irish Independent newspaper published today. German Chancellor Angela Merkel rejected such criticism, saying in Seoul today “the future crisis mechanism has nothing to do with the debate going on right now.”
“Clarification was needed and it is good news it’s now out there,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc.
EU countries established the bailout fund in May to protect the euro area from the fallout of the Greek-led debt crisis. Speculation has grown that Ireland would need it after a housing-led recession and the need to save its biggest lenders plunged it into fiscal turmoil.
Bailing out Ireland’s financial system could cost as much as 50 billion euros under a “stress case” scenario compiled by the Finance Ministry and central bank. The country’s gross funding need for 2011 will be 23.5 billion euros, falling to 18.6 billion euros in 2014, the nation’s debt agency said today.
Irish officials have indicated they hope a 2011 budget, due for release on Dec. 7, will placate markets as they try to cut a budget deficit which will be about 12 percent of gross domestic product this year, or 32 percent when the costs of the banking rescue are included. Lenihan’s plan includes 6 billion euros of spending cuts and tax increases next year.
“The more time elapses, the bigger is the chance that the results of fiscal policies will show,” said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London. “The more time elapses before a country taps the fund the better.”
Ireland’s banks are nevertheless becoming more dependent on the European Central Bank after it said in September saving its lenders may cost as much as 50 billion euros as the state sinks more funds into nationalized Anglo Irish Bank Corp. and other lenders. Lenders’ borrowings from the ECB rose 7 percent last month, according to statistics published on the central bank’s website today.
“The chances are rather big that at some point they need to ask for financial assistance just to calm down the situation,” Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam, said today. “There will have to be a solution.”
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