Irish play down borrowing cost fears as EU vows to help

Ireland yesterday admitted a surge in its borrowing costs to record highs was "very serious" as the European Union pledged to come to its euro partner's rescue.

• Irish finance minister Brian Lenihan

EU officials said they were monitoring developments in Ireland closely but denied, for a second day running, that Dublin was seeking financial aid, in an ominous echo of the rhetoric that preceded an EU/IMF bail-out of Greece six months ago.

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

But a survey of 30 economists and bond strategists showed two thirds saying Ireland was unlikely to make it through 2011 without external support.

"The bond spreads are very serious and there is international concern throughout the eurozone about that," Irish finance minister Brian Lenihan said.

He blamed part of the surge on "unintended" comments from German officials about a new permanent rescue mechanism for the eurozone that would force private debt holders to shoulder part of the costs of future rescues. Although Germany has made clear 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's 11-year history.

Mr Lenihan said Ireland was seeking clarification of German plans and would soldier on without aid. "We have the capacity to put the state on a sustainable and credible basis," he said.

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

Markets are sceptical and worry the government will struggle to win passage next month of a draconian 2011 budget that foresees €6 billion (5bn) in cuts. Jitters have pushed yields on ten-year Irish bonds up to 9 per cent from 6 per cent in just three weeks.

Speaking at the G20 summit in Seoul yesterday, European Commission president Jose Manuel Barroso said the EU was ready to assist. "What is important to know is that we have all the essential instruments in place in the European Union and eurozone to act if necessary," Mr Barroso said

Irish bank shares fell sharply, reflecting renewed fears about their exposure to the country's wrecked property market.

Shares in Allied Irish Banks shed 6 per cent and Bank of Ireland was off 7 per cent. The cost of insuring both banks against default surged to new highs on Wednesday, at over 900 and 700 basis points respectively.Foreign banks with a large exposure to Ireland, notably Royal Bank of Scotland, also fell.

In a sign of the broader worries haunting the eurozone, the cost of insuring sovereign Irish, Portuguese and Spanish debt also rose to record highs.

The spread between Irish ten-year bond yields and those of German benchmarks - a key gauge of confidence - rose above 680 basis points, hitting a new high for a ninth straight session.

Irish premier Brian Cowen's government has pledged to outline a four-year plan later this month to bring the ballooning budget deficit under control.

It then aims to push through the 2011 budget on 7 December, a hurdle many believe Mr Cowen is not likely to overcome.

However, some analysts say only an early election that produces a new government may convince investors that Ireland can tackle its debt crisis.

Should Ireland fall, concerns about Portugal and probably Spain could rise, dragging the eurozone into a new crisis with global implications.