EU leaders yesterday sought to reassure bondholders unnerved by Ireland’s fiscal problems they would not be forced to take a writedown, but Ireland’s prime minister said recent French and German comments had aggravated the problem.
A statement by France, Germany, Italy, Spain and Britain was issued at the G20 summit in Seoul after spreads on Irish 10-year government bonds over German bunds surged to a record high, hitting the debt of Portugal and Spain and the euro.
“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 programme under current instruments,” the statement said.
Irish Prime Minister Brian Cowen told the Irish Independent newspaper that the stance of some EU members, and particularly comments by Germany and France, had complicated his efforts to battle a financial crisis that threatens his government.
CONSEQUENCES
“It hasn’t been helpful,” he said, referring to German Chancellor Angela Merkel’s intervention. “What has been said there has had, I think, an unforeseen consequence, perhaps.”
“I’m not suggesting that anything was said for the purposes of causing further difficulty,” he said in the interview, but added: “The consequence that the market has taken from it is to question the commitment to the repayment of debt.”
He said bond markets were “behaving irrationally” and Irish interest rates had jumped 1 percent on Wednesday for no reason.
The EU is looking at new rules for debt issued from 2013 that may entail private investors rolling over existing debts or to bear their share of losses, as has been the case in new contracts written into debt programs of some emerging market issuers.
Ireland forced its way onto the G20 agenda as investors fretted it could default as a result of the rising costs of its bank rescue program that has already driven its budget deficit to 32 percent of GDP.
“I spent a bunch of time, and I’m sure other ministers did, talking about developments in Europe. But that’s what you’d expect,” a senior US official said, in response to a question about Ireland.
So far, Ireland has not requested financial aid.
Dublin’s fiscal woes have been triggered by concerns that it will need to spend more to rescue its stricken banking system.
On Thursday, the cost of insuring Irish debt against default hit a record high and the 10-year Irish bond spread over equivalent German debt — another measure of perceived risk — reached 685 basis points, the highest since the euro was introduced.
A Reuters poll showed that 20 of 30 economists surveyed believed Ireland would need a bailout of about 48 billion euros (US$65.4 billion) before the end of next year.
MEMORIES OF GREECE
The crisis in Ireland has revived memories of Greece’s brush with default earlier this year that required combined EU and IMF intervention costing 110 billion euros and which sparked a selloff in the euro and questions over the single currency’s viability.
Since then the euro zone has set up a 440 billion euros sovereign rescue fund backed by another 310 billion euros of IMF and EU funds that could be deployed in countries such as Ireland to stem a run on markets.
Portugal, Spain and Italy are also seen as vulnerable to any troubles in Ireland as investors shun risky euro zone assets.
“The effects of euro zone peripheral bond concerns are spreading through euro zone markets and hitting risk appetite in the process,” said Mitul Kotecha, global head of currency strategy with Credit Agricole CIB in Hong Kong.
“The euro is a clear casualty, having dropped further against the US dollar and versus other currencies,” Kotecha said.
The euro fell below US$1.36 yesterday for the first time since late September.
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