EU seeks to calm Irish creditors but doubts linger

By Carlo Piovano

Associated Press

Published: Friday, Nov. 12 2010 7:00 p.m. MST

Irish Minister for Finance Brian Lenihan, right, holds a joint press conference with EU Commissioner Olli Rehn to discuss Ireland's austerity plans, at the Department of Finance in Dublin, Monday Nov. 8, 2010.

Associated Press

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LONDON — European leaders sought to reassure Ireland's panicky creditors Friday by promising that tougher new terms for future bailouts of indebted countries will not harm them. But nerves remained frayed as some expect the country to follow Greece in grasping for a financial lifeline sooner rather than later.

Speculation about a bailout for Ireland pushed the Dublin government's borrowing costs to record highs this week, the latest indication that the continent-wide crisis over governments with too much debt is still festering and clouding prospects for a hesitant economic recovery.

In a statement that helped calm market fears and lowered Irish bond yields, the finance ministers of Germany, France, Italy, Spain and Britain said the EU's proposed new bailout mechanism "does not apply to any outstanding debt."

That means current lenders to governments would not be liable for extra costs in case of a bailout by Ireland's partners in the 16-country euro currency. Germany has been pushing to share the bailout burden with investors but has not explicitly said it would seek to impose those changes.

Pressed by volatile markets, EU ministers agreed to be clearer about their intentions and confirmed the new rules would not come into force before mid-2013.

Germany's push to make investors take a "haircut" — or only partial repayment in case of a bailout — led to a bond sell-off recently as investors feared additional losses. That had the effect of cranking up yields on Irish bonds — and potentially increasing borrowing costs the already-strapped country would have to pay when it goes back into the bond market for new borrowing.

The EU ministers' statement took the edge off tensions in bond markets, pushing the Irish 10-year bond yields to 8.13 percent from 8.87 percent on the open and Thursday's record high of 8.95 percent. Yields rise as bond prices fall, and higher yields signify more investor perception of risk they won't get paid back.

While the statement calmed market jitters, media reports nevertheless surfaced that Ireland was in talks with the EU to receive emergency funding for a eurozone financial backstop program. The government denied it was asking for help.

"There's no application for emergency funding from the EU. We're not in talks with the EU on this issue," said an Irish Department of Finance official Friday on condition of anonymity, according to the ministry's policy.

The central bank, the prime minister's office and EU officials also denied the report.

Traders remained on edge as a concrete decision on the new bailout mechanism and its implications for private investors will not be made before the middle of December at the earliest, when EU leaders meet.

EU finance ministers will gather and discuss the issue next week, but the European Commission, which is tasked with creating new rules as part of a permanent mechanism to deal with sovereign bankruptcies, will not have anything concrete to offer yet.

Jim Power, chief economist at Friends First in Dublin, said that even though Ireland has enough cash to last it through the middle of 2011, emergency funding from the EU could become necessary if markets remain volatile.

"Not because Ireland necessarily needs a wheelbarrow of money right this minute, but because Ireland is now a systemic risk to the EU and the euro currency. The EU is not going to allow a member country to go through what Ireland's been going through indefinitely," Power said.

The fear is that investor worries will spread to other indebted countries such as Spain, driving up borrowing costs until the debt load becomes unsustainable.

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