Tags: EU | Europe | Financial | Crisis

Debt Tensions Flare up as Ireland Denies Bailout

Monday, 15 Nov 2010 03:29 PM

 

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Europe's debt crisis spread widening ripples Monday, with Irish officials denying that their talks with other eurozone governments were aimed at getting a bailout, while the Greek Prime Minister accused Germany of making things worse with talk of forcing creditors to take losses.

The flare-up in tension adds to pressure on EU finance ministers, who will be in Brussels Tuesday for their monthly meeting.

After spending their recent gatherings focusing on crisis prevention, a weeklong sell-off of Irish and Portuguese bonds has thrown them back into crisis management.

The Irish Department of Finance said in a statement Monday it was pursuing "contacts at official level" with other eurozone governments and the EU, but aides to Finance Minister Brian Lenihan emphasized Ireland has no need for a lifeline from the 750 billion euro ($552.35 billion) financial backstop for the eurozone. Ireland says it had enough cash to last through mid-2011.

Greek Prime Minister George Papandreou, meanwhile, said German pressure to create a mechanism that would let governments default on their debts in the future was scaring off desperately needed investors.

"Whether understood or misunderstood (the German proposal) created a spiral of higher interest rates for the countries that seemed to be in a vulnerable position — such as Ireland and Portugal," Papandreou said in a speech in Paris. "But this could break backs. This could force people into bankruptcy."

Papandreou's comments came as the EU's statistics agency said Greece's 2009 deficit had reached 15.4 percent of GDP, up significantly from a previously estimated 13.6 percent. While the upward revision had been well telegraphed to the markets, it underlined the difficult task Athens faces in getting its deficits below 3 percent by 2014, as specified in its euro110 billion bailout agreement in May.

Analysts said investors needed the finance ministers in Brussels to offer a clear path forward for Ireland to reduce its deficit and bear the costs of its enormous bank bailout. Otherwise markets would continue to dump the bonds of EU's peripheral nations.

Signaling concerns that Ireland's problems could drag down other highly indebted nations, Portugal's Finance Minister Fernando Teixeira also saw himself forced to deny that his government had sought financial aid.

"Portugal has made no official or informal contacts with a view to seeking European aid," Teixeira dos Santos said in an interview Monday with financial newspaper Jornal de Negocios. But he added that "if Ireland's situation deteriorates" the market pressure on Portugal would increase.

He insisted that Portugal is "not in a position of unsustainability" and denied reports Lisbon had tried to influence Ireland's decision on whether to accept aid.

EU officials also rejected reports that other eurozone nations were pressuring Ireland to tap the EU's stability fund.

"There are concerns in the euro area about the financial stability of the euro area as a whole, once again," said Amadeu Altafaj Tardio, a spokesman for Monetary Affairs Commissioner Olli Rehn.

"But to say that there are strong pressures to push Ireland to any kind of rescue of this kind I think is an exaggeration."

Ireland has a strong track record when it comes to cutting spending and deficits, said Altafaj Tardio, but he added that it was now up to the Irish government to show it could continue to cut its deficit when it presents its eagerly awaited four-year budget plan.

Ireland is struggling to slash a budget shortfall that will likely balloon this year to a staggering 32 percent of GDP — a record for postwar Europe. The government's budget dropped deep into the red after its euro45 billion rescue of five banks that were hit hard when the country's real estate bubble burst in 2008.

The yield, or interest rate, on Ireland's 10-year bonds fell Monday in expectation that other EU nations would intervene to ease the Irish cash crisis. The yield rate opened at 8.14 percent and closed at 7.94 percent.

High yields reflect weak market confidence in ability to pay. They also compound Ireland's effort to reverse its gigantic deficits because it means higher interest costs on any new borrowing in the markets.

The yield had peaked Thursday at a record 8.95 percent — before several key EU members, led by Germany, issued a statement stressing that they had no plans to make current bondholders eat losses in event of an Irish bailout.

EU governments, led by Germany, last month agreed to set up a so-called permanent crisis resolution mechanism, which would ensure that private investors shoulder some of the pain the next time a eurozone government runs into trouble. Even though policymakers repeatedly emphasized that the mechanism would only affect debt issued after 2013, when the current financial backstop expires, the plan nevertheless prompted a sell-off in Irish and other vulnerable government bonds.

Irish politicians said the current terms for taking EU aid were hardly ideal for Ireland. They noted that the loans would require repayment or refinancing within three years, and simultaneously would cripple Ireland's ability to borrow money on the bond market.

"If you take a bailout, you lose control of your economic policy for three to five years, and the bailout fund is three-year money," said Joan Burton, finance spokeswoman for the opposition Labour Party. "If you're on three-year money, you keep reaching cliffs over and over again."

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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