Irish contagion hits wider eurozone
Evidence is growing of the impact that Ireland’s record cost of borrowing is having on the wider eurozone, with signs of contagion spreading throughout the debt markets of the single currency bloc.
Irish bond yields hit fresh highs while the extra cost that Italy and Spain pay for borrowing over Germany jumped to levels not seen since the launch of the single European currency in 1999.
In effect, the bond market is already pricing in debt defaults in Greece, Italy and Portugal – the eurozone’s three weakest economies – with many analysts saying Dublin and Lisbon will have to follow Athens in seeking a European Union rescue.
She acknowledged her stance had scared financial markets, which have punished Irish, Greek and Portuguese debt for two weeks. It was unfair for European taxpayers to finance rescues of debt-laden countries on their own, she said at the Group of 20 summit in Seoul,
We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”
Portugal called for an urgent clarification of Germany’s proposal. Fernando Teixeira dos Santos, Portugal’s finance minister, said European institutions should “clarify with the greatest possible urgency how this mechanism will work”.
Minimal help is expected from the European Central Bank. Jürgen Stark, an ECB executive board member, said there could be “no financing of public budgets through the central bank”, suggesting ECB bond purchases to keep markets functioning would remain small-scale.
Domenico Crapanzano, head of euro rates sales and trading at Jefferies, said: “We are certain that Ireland and Portugal will have to seek financial assistance like Greece. The cost of borrowing in these countries is not sustainable.”
Irish officials have said they are currently funded through the spring, making it unnecessary for them to have to borrow from the bond market at current high rates. Brian Lenihan, Irish finance minister, said in Dublin: “We have the capacity to put the state on a sustainable and credible basis.”
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