Markets in muted response to Irish bail-out

The euro traded near two-month lows against the dollar, while Italian bond yields jumped and default insurance for Portuguese and Spanish debt hit record highs as investors continued to ask "who's next" in the euro debt crisis.

Speculation also rose about assets held by the Bank of Ireland which vowed to raise 2.2bn to avoid resorting to the bailout. The bank has until February to raise the funds or else see the state's 36 per cent stake raised to more than 74 per cent to become virtually nationalised.

The bank said it would raise the money through a rights issue or through "internal capital management initiatives... and other capital markets sources". But others pointed to the possible sale of its businesses, raising questions over whether it will be able to retain its deal to offer financial services through Britain's post office network.

Allied Irish Bank, which needs to raise almost €10bn, is to be effectively nationalised, while the already nationalised lender Anglo Irish Bank could be closed for business in the new year.

Olli Rehn, Europe's commissioner for economic and monetary affairs, insisted Ireland will rebound "relatively rapidly" from its current economic woes.

"The Irish will get over this challenge and the EU is supporting them in that," he said.

Greece too got an extra boost from Europe as it agreed to extend the repayment of its €110bn EU/IMF bail-out loan to 2021 in exchange for a higher fixed rate of interest.

Wolfgang Schaeuble, the German finance minister, said calm and reality should return to financial markets and French economy minister Christine Lagarde said "irrational" markets were not pricing sovereign debt risk in Europe correctly.

A Spanish central bank official yesterday dismissed the possibility that his country will need a bail-out.

Jose Luis Malo de Molina, director general at the Bank of Spain, said the Spanish "financial system is essentially sound".