LONDON - Ireland's debt crisis eased a notch Friday after European governments reassured investors that new, tougher terms for bailouts will not expose them to higher costs on their current holdings of Irish bonds.
In a short statement meant to calm market fears and keep investors from selling off Irish bonds, 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. Germany has been pushing to share the burden with investors, but has not explicitly said it would seek to impose those changes on investors' current holdings.
Pressed by market jitters that threatened to turn Ireland into the next Greece, EU ministers agreed Friday 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 selloff, as investors feared additional losses in case it comes to a rescue. that had the effect of cranking up yields on Irish bonds -- and potentially the increase borrowing costs the already-strapped country would have to pay when it goes back into the bond market for new borrowing.
The statement took the edge off tensions in bond markets, pushing the Irish 10-year bond yields to 8.25 per cent from 8.87 per cent on the open and Thursday's record high of 8.95 per cent.
Traders remained on edge, however, 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.
After saving Greece from bankruptcy in May, the EU set up the European Financial Stability Facility, a euro750 billion (US$1.03 trillion) backstop for any other countries that might need support. But that was meant only as a temporary cash guarantee until the EU agreed firm guidelines on how to deal with sovereign default.
Significantly, anger grew among citizens in less profligate countries -- particularly Germany, the region's paymaster -- over having to pay for other countries' overspending. The fact that investors, whose job it is to risk money in order to make financial gains, were guaranteed against losses caused an uproar that politicians are still trying to calm.
Analysts at Glas Securities in Dublin say that lack of full understanding by investors of the bailout mechanism "has in itself added considerably to the 'fear of the unknown' and consequent rise in Irish yields."
Other heavily indebted countries like Portugal and Spain have likewise seen their borrowing costs jump as investors reassessed the risk involved in holding their debt in light of the potential changes to the bailout rules.
"Market participants will still probably have to accept that the issue will drag on for some time but have this morning received a reassurance that the final outcome is unlikely to be as penal as initially feared," the analysts said in a note to investors.
Ireland has enough cash to last through the middle of next year, meaning it is unlikely to require a bailout like Greece's soon. However, the sheer size of the country's banking crisis -- its bailout is the world's largest when measured per capita -- suggests the government will take a very long time to regain market trust in its finances.
That is not helped by the dire outlook for the economy, which the government is pounding with savage austerity cuts to lower its budget deficit. The government's focus is on honoring global investors' claims on otherwise bad loans, saddling public finances and taxpayers with the losses in an effort to retain investors' trust.
Meanwhile, unemployment is high and the property market, which helped inflate the Celtic Tiger's growth bubble, remains in the doldrums and is still claiming victims -- Irish media reported Friday that Michael McNamara & Co., one of the country's biggest construction firms, was put into receivership under the weight of some euro1.5 billion in loans it could not service.
Ireland's government has an ambitious plan to slash euro6 billion ($8.5 billion) from its 2011 deficit in a budget that will go to lawmakers in December. Beyond that, the government hopes to prune euro9 billion more in coming years to get Ireland's deficit -- currently running at a modern European record of 32 per cent of GDP -- back to the euro zone's limit of 3 per cent by 2014.
Brian Lenihan, Ireland's finance minister, welcomed the clarity and solidarity provided by his EU counterparts.
He said in a statement that the "EU partners have confirmed their full confidence in the budgetary strategy being pursued by the government."
