Ireland’s struggle to cope alone: Maley

Pressure on Ireland to sign up for emergency rescue plan has intensified after Portugal warned that it risked becoming collateral damage of the collapse in investor confidence in Ireland.

Portugal’s finance minister, Fernando Teixeira dos Santos, said that markets believed there was a “high” risk that Portugal would be forced to seek financial assistance because of the current eurozone crisis, according to a report in the Financial Times.

“The risk is high because we are not facing only a national or country problem. It is the problems of Greece, Portugal and Ireland,” he said.

He added that markets grouped the three economies because they were all members of the eurozone. “Suppose we were not in the eurozone, the risk of the contagion could be lower.”

According to the French newspaper, Le Monde, the minister later issued a statement to Portugal’s official news agency saying that the country had not made any request to Brussels, either formal or informal, for financial assistance.
“Portugal is financing itself in the markets and believes it will continue to be able to finance itself in the markets,” he declared, saying the situation of the two countries was “very different”.

But, he added, “we cannot ignore the fact that there is a contagion effect.”
Le Monde also reported that, earlier in the day, Teixeira dos Santos urged Dublin to think of the effects on other members of the eurozone members when it came to requesting financial assistance. “I don’t want to lecture the Irish government, but I want to believe it will decide to do what is most appropriate both for Ireland and for the euro,” he said.

Portugal is now being menaced by a sovereign debt crisis similar to the one that savaged Greece earlier in the year, and that is currently stalking Ireland. Nervous markets have pushed yields on 10-year Portuguese bonds to around 7%, a yield of around 4.5 percentage points above comparable German bunds. Higher interest costs make it much more difficult for Lisbon to achieve the budget deficit cuts that are needed to reassure markets. The country has outlined austerity measures which should see its budget deficit shrink to 4.6% of GDP next year, from 7.3% this year.

At the same time, yields on Irish 10-year bonds are now trading above 8%, which has raised speculation that the country will eventually request around €80 billion euros ($US110 billion) in financial assistance, possibly at the meeting of eurozone finance ministers in Brussels later today.

Germany is pressing Ireland to accept a bailout, which it believes will calm financial markets, and reduce funding costs for the more vulnerable eurozone economies. But Ireland is keen to avoid the humiliation of having to go ‘cap in hand’ to the European Union for financial aid, and to allowing officials from the European Union and the IMF dictate its budget policy. Instead, Ireland is arguing that it doesn’t need to raise money until the middle of next year, and the country is likely to release its four-year plan for turning around the country’s finances early next week.

However, market jitters are forcing the Irish banks to increasingly turn towards the European Central Bank for funding. At the end of October, borrowing by Irish banks from the ECB stood at €130 billion, or around 80% of Ireland’s GDP.

Bundesbank President, Axel Weber, has called for an end to the ECB’s emergency bond-buying program that helps weaker countries such as Ireland, Portugal and Greece. There is a risk that if the ECB buys too many of these bonds, the quality of its balance sheet will be undermined, which will reduce its effectiveness.

Bond yields for Ireland, Portugal and Greece have spiralled since EU leaders agreed at the end of October to a German plan that would set up a permanent crisis mechanism to replace the $US1 trillion emergency rescue fund that expires in 2013. This new mechanism would force bankers and bondholders to shoulder more of the losses from financial crisis.

But German Chancellor Angela Merkel has rebuffed criticisms that her plans for forcing bankers and bondholders to bear more of the cost of future bailouts had reignited the eurozone crisis.

The German publication, Der Spiegel, reported that Merkel told delegates at the Christian Democratic Union party congress that she was determined to create a new “culture of stability” in Europe.

Market excesses, she said, had caused the crisis, and “markets have to bear the consequences of their actions.”

She added: “It’s up to us. It’s our task to create a new anchor for a culture of stability in Europe.”

This article first appeared on Business Spectator.