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Ireland faces possible debt crisis; leaders hope to avoid tapping E.U. aid

By Carmel Crimmins
Thursday, November 11, 2010; 10:23 PM

DUBLIN - Ireland warned Thursday that a surge in its borrowing costs to record highs had become "very serious," and the European Union said it was ready to act should the humbled former "Celtic Tiger" require a rescue from its euro partners.

European officials said they were monitoring developments in Ireland closely but denied for a second day that Dublin was seeking financial aid, in an ominous echo of the rhetoric that preceded a bailout of Greece by the E.U. and the International Monetary Fund six months ago.

Unlike Greece, Ireland is fully funded through the middle of next year, meaning a liquidity crisis is not imminent.

Deeply unpopular and clinging to a razor-thin majority in parliament, the government is battling to prove it does not need a Greek-style rescue to help it reduce a budget deficit that will total 32 percent of gross domestic product this year, easily the highest in Europe.

Prime Minister Brian Cowen has pledged to outline a four-year plan later this month to bring the ballooning budget deficit under control. However, investors are worried that the government will struggle to win passage next month of a draconian 2011 budget that foresees more than $8 billion in cuts.

Those market jitters have pushed the yields on 10-year Irish bonds up to 9 percent from 6 percent in just three weeks. In a sign of the broader worries haunting the euro zone, the cost of insuring sovereign Irish, Portuguese and Spanish debt against default also pushed up to record highs.

"The bond spreads are very serious and there is international concern throughout the euro zone about that," Irish Finance Minister Brian Lenihan said in Dublin.

Lenihan blamed part of the surge on "unintended" comments from German officials about a new permanent rescue mechanism for the euro zone that would force private debt holders to help shoulder the costs of future rescues.

Although Germany has made clear that the new mechanism would not apply to existing debt, the plan has spooked markets, raising fears of a domino effect on peripheral euro members that only weeks ago appeared to have weathered the worst crisis in the single-currency bloc's 11-year history.

Speaking to reporters at the Group of 20 summit in Seoul on Thursday, European Commission President Jose Manuel Barroso said the E.U. was ready to move should Ireland need assistance.

"What is important to know is that we have all the essential instruments in place in the European Union and euro zone to act if necessary," Barroso said, in comments welcomed by Lenihan.

- Reuters

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