Irish officials however denied they were seeking a lifeline from the EU’s bailout fund, while Greece revealed revised figures showing a bigger budget deficit.
EU chiefs meeting in Brussels on Tuesday are anxious to quell market fears of an eventual Irish debt default. Those fears are driving up the borrowing costs of other EU nations saddled with red ink, notably Greece, Spain and Portugal.
Analysts said investors needed the finance ministers in Brussels to offer a clear path forward for Ireland, otherwise they would continue to dump the bonds of EU’s peripheral nations in favor of German bunds.
With fears mounting that Ireland could become the next euro zone country after Greece to be bailed out, the Irish Department of Finance said in a statement it was pursuing “contacts at official level.”
Aides to Finance Minister Brian Lenihan, however, emphasized Ireland has no need for emergency aid given it has enough funds to operate through mid-2011.
Ireland is struggling to prop up its failed banks and simultaneously to slash a deficit that has ballooned this year to a staggering 32 percent of GDP, a record for post-war Europe.
While Greece spent its way to disaster, much of Ireland’s 2010 deficit involves the government’s euro45 billion takeover of five banks that ran into trouble in the collapse of the country’s real estate boom.
Adding to the pressure on euro zone finance ministers, the European Union statistic agency said Monday that Greece’s 2009 budget deficit and debt were significantly higher than previously estimated.
The revised budget deficit for 2009 of 15.4 percent of GDP will make it harder for the Greek government to reach targets agreed set out in its bailout agreement this spring. The revision was broadly telegraphed to markets by Greek officials, but it underlined how far Europe’s indebted countries have to go before they are out of trouble.
Finance department officials declined to comment on Irish media reports that the government is discussing whether the EU fund could be used to support the short-term cash needs of particular Irish banks, rather than the state. Three of the five bailed-out banks have already been nationalized, and Allied Irish Banks appears certain to be nationalized too within weeks. Only Bank of Ireland has been able to borrow money on the open market.
Irish Finance Minister Lenihan will traveling Tuesday to Brussels to discuss the Irish crisis — and its impact on the rising debt costs of other European nations — with fellow finance ministers across the 27-nation union.
The yield, or interest rate, on Ireland’s 10-year bonds remained feverishly high though little changed from Friday in early Monday trading. The contract opened at 8.14 percent and oscillated in a narrow range of 8.13-8.22 percent, reflecting investors’ uncertainty over the rumors of an EU aid offer.
That is down from almost 9 percent on Thursday, after EU finance ministers said bondholders would not take losses if it comes to a bailout. The high yields are both a sign of weak market confidence in Ireland, and a complicating factor in righting the country’s gigantic deficits since they mean higher borrowing costs when the government next taps bond market.
The Irish Independent newspaper reported that Lenihan plans to ask other finance ministers about the possibility of using the 750 billion euros ($1.05 trillion) European Financial Stability Facility to funnel short-term aid directly to debt-crippled Irish banks, rather than to government coffers. The newspaper, which did not name its sources, said the strategy would allow Lenihan “to save face while maintaining control of the economy.”
On Sunday, Irish Justice Minister Dermot Ahern denied widespread reports that Ireland was negotiating terms of a bailout package, describing them as “total fiction.” The reports, largely based on unidentified sources, said the potential scope of a rescue deal would range from 60 billion euros to 80 billion euros.
“While there is ongoing uncertainty in relation to the need or desire for EU aid, volatility in the Irish bond market looks set to continue,” Dublin-based Glas Securities said in a statement.
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.”
