Pressure on Ireland eases after EU statement
EU leaders reassured investors on Friday they would not be forced to writedown the value of their bond holdings in the event of a new euro zone bailout, easing pressure on Irish debt that has sparked fresh fears of contagion.
The spreads between Irish bond yields and German benchmark issues -- a key gauge of faith in Irish finances -- fell to 635 basis points after spiking to record highs near 700 earlier amid concern the former "Celtic Tiger" may need a Greek-style rescue.
Pressure on other peripheral euro zone countries like Greece and Portugal also eased after a statement by France, Germany, Italy, Spain and Britain issued at the Group of 20 summit in Seoul confirmed that holders of existing debt would not be asked to shoulder the costs of any near-term rescue.
"Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any program under current instruments," the statement said.
The statement came as Irish Prime Minister Brian Cowen hit back at Germany for pushing the idea of so-called "haircuts" for private bondholders in a future rescue mechanism for the single currency zone that would probably not go into force before 2013.
Although Germany has made clear the new mechanism would not apply to existing debt, the plan has spooked investors, who have sent the borrowing costs of peripheral euro countries to record highs, sparking concern about the future of the currency bloc.
"It hasn't been helpful," Cowen told the Irish Independent newspaper, referring to Germany's drive to put in place a new mechanism. "The consequence that the market has taken from it is to question the commitment to the repayment of debt."
Concerns about Ireland and fears its woes could drag down other euro zone countries like Portugal and Spain have weighed on the euro currency, which hit its lowest level against the dollar since late September on Friday.
But the EU statement appeared to calm bond traders after a fierce two-week selloff of peripheral euro debt. Greek spreads
dropped below 920 basis points after rising to 985 earlier in the session and Portuguese spreads also narrowed.
The cost of insuring Irish, Spanish and Portuguese debt against default also fell slightly.
No Mention of Haircut
Gilles Moec, an economist at Deutsche Bank, said the fact that the EU statement did not include any mention of "haircuts" was a positive for the markets and reflected a clear desire on the part of EU politicians to calm investors.
"I think that it is very significant that the possibility of haircut is not mentioned," he said. "I think that's a clear signal they want to send to the market."
Irish Finance Minister Brian Lenihan welcomed the clarification from EU ministers in South Korea, saying it showed their "full confidence" in the budgetary strategy of the Irish government.
However, the Irish Times reported on Friday that informal contacts were already under way between Brussels, Berlin and other capitals to assess their readiness to activate a 750 billion euro rescue fund in the event of an application from Dublin.
Irish officials have insisted they have no intention of tapping that fund, stressing they are not in the same situation Greece was back in May, when it was forced to seek a 110 billion euro ($150 billion) rescue from the EU and IMF.
Ireland is fully funded until mid-2011 and therefore does not face an acute liquidity crisis as Greece did six months ago.
Ireland expects to return to the market early next year and hopes a four-year 15 billion euro austerity plan to be unveiled later this month and passage of the 2011 budget in early December will bring its borrowing costs down.
"We're not borrowing at the present time so I don't think any of what's going on at the moment is going to affect the real price of Irish borrowing," Eamon Ryan, communications minister, said on Friday. "When we do have to go out next year, I think there will be different circumstances."
[Source: By Lorraine Turner and Gernot Heller, Reuters, Dublin and Seoul, 12Nov10]
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