Ireland's crisis flares as investors dump bonds

DUBLIN (AP) - Ireland's financial troubles loomed large Wednesday as investors - betting that the country soon could join Greece in seeking a bailout from the European Union - dumped Irish bonds and drove the interest rate on the country's borrowing to a new high.

The yield, or interest rate, on 10-year bonds surged above 8 percent for the first time since the launch of the euro, the European Union's common currency, 11 years ago.

Bond traders increasingly believe that Ireland soon will be forced to tap Europe's emergency fund for euro-zone nations facing a threat of bankruptcy. The 16 nations of the euro zone created that €750 billion backstop in May as the EU and International Monetary Fund provided an emergency €110 billion loan to Greece.

Another bailout would send more shock waves through the currency union, which has struggled to find ways to keep individual governments from overspending and threatening the currency's value.

Flaring financial tensions have driven the euro off recent 6-month highs of $1.428 versus the dollar. The euro fell more than a cent Wednesday to $1.3670.

The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout of five banks would cost at least €45 billion, equivalent to €10,000 for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 percent of GDP, the highest in post-war Europe.

To combat this, Ireland plans to impose €4.5 billion in cuts and €1.5 billion in new taxes in its 2011 budget. It will be the first stage in a four-year plan designed to slash the deficit by €15 billion.

The governor of Ireland's Central Bank, Patrick Honohan, said he doubted that any intervention from the EU and IMF would impose anything tougher than what Ireland is already proposing to inflict on itself.

"I doubt that the IMF would be interested in advocating a shift in policy," Honohan told an audience of international bankers and investors in Dublin. "The fiscal policy that's been laid out ... seems exactly the right balance for what is needed to get the finances back on a convegent path."

The yield on 10-year Irish notes rose steadily from 7.94 percent and reached 8.55 percent in afternoon trade. As the value of bonds fall, buyers demand ever-higher yields as compensation.

Traders accelerated their offloading of Irish bonds after London-based LCH.Clearnet Group announced Wednesday it would require clients who deal in Irish bonds to increase the percentage of cash deposited up front to 21 percent, compared to a usual deposit of less than 6 percent. The move came on top of decisions this month by the governments of Russia and Chile to stop buying Irish debt.

Like Ireland, Portugal and Spain both are enduring bond-market speculation of a future default, and are slashing spending to cope with deficits far above the euro-zone limit of 3 percent of GDP. Only the Irish government is simultaneously trying to fund a massive bank-bailout program that threatens to swamp its ability to pay its own bills.

Portugal successfully auctioned €1.25 billion in new bonds Wednesday but at the price of offering exceptionally high yields. Its new 10-year bonds paid average yields of 6.8 percent, up from 6.24 percent at a similar auction in September, while the yields on its 6-year bonds surged to 6.15 percent, compared to just 4.37 percent two months ago.

Analysts said the particularly strong jump in the cost of selling shorter-term debt illustrated how buyers are pricing in the potential for default pressures to grow in Portugal sooner rather than later.

On Tuesday, yields on Portuguese 10-year bonds spiked above 7 percent for the first time in expectation that the bond auction might face even greater difficulties.

Prime Minister Brian Cowen insists Ireland has enough cash on hand to fund the government budget through June 2011. But he needs the interest rates being demanded by investors to fall substantially before Ireland needs to borrow again in early 2011.

Unless Irish yields decline to pre-crisis levels, Ireland would have to pay punitive rates of interest to woo new buyers of Irish bonds, further handicapping its ability to rein in government costs.

But some economists say tapping the European fund - whose rules have yet to be fully agreed among members - could be nearly as expensive, with rates likely to exceed 6 percent. And the reputational damage done to Ireland if it failed to pay might do even more damage, they argued, to a country that relies heavily on investment from 1,000 foreign multinationals.

"If the EU and IMF were asked to intervene in Ireland, they'd just do what we're trying to do anyway," said John O'Hagan, an economics professor at Trinity College Dublin. "So why not keep trying to do it under our own steam and maintain our independence?"

Overshadowing Ireland's struggle is the question of how long Cowen can cling to power. Opposition chiefs insist they will vote against the 2011 budget when it's unveiled Dec. 7 in hopes of forcing him from office.

Cowen has a three-vote majority in parliament that includes highly conditional support from two independent lawmakers, who are seeking extra finance for rural road projects, a hospital and a casino project - goals diametrically opposed to Ireland's austerity push. Cowen says he cannot provide public details of his private funding promises to the two lawmakers.

Cowen's majority is expected to fall to just two votes following a Nov. 25 by-election to fill a seat left vacant for the past 17 months.

Opposition lawmakers bombarded Cowen with demands that he surrender power and call an early election, so that a new government with a strong majority could take charge.

"It's like the last days of the Roman Empire around here," Labour Party lawmaker Pat Rabbitte told Cowen. He accused the prime minister of destroying Ireland's morale, and called on him to drive immediately to the official residence of Ireland's symbolic head of state, President Mary McAleese, to resign.

"The people who are dropping the morale are the people who exaggerate the weaknesses in our economy," Cowen replied, jabbing an accusatory finger at the opposition benches.