DUBLIN - 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 -- drove the interest rate on the country's 10-year borrowing to a new high.
The yield, or interest rate, on 10-year bonds rose above 8 per cent 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 C750 billion backstop in May as the EU and International Monetary Fund provided an emergency C110 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 has driven the euro off recent 6-month highs of $1.428 versus the dollar. The euro was trading Wednesday at $1.3760, down from its opening of $1.3773.
The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout of five banks would cost at least C45 billion, equivalent to C10,000 for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 per cent of GDP, the highest in post-war Europe.
The yield on 10-year Irish notes rose steadily from 7.94 per cent and passed 8.4 per cent 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 per cent, compared to a usual deposit of less than 6 per cent. The move came on top of decisions this month by the governments of Russia and Chile to stop buying Irish debt.
Portugal and Spain are also facing bond-market speculation of a future default, which like Ireland are slashing spending to cope with deficits far above the euro-zone limit of 3 per cent 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 C1.25 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 per cent, up from 6.24 per cent at a similar auction in September, while the yields on its 6-year bonds surged to 6.15 per cent, compared to just 4.37 per cent 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 sooner rather than later.
On Tuesday, yields on Portuguese 10-year bonds spiked above 7 per cent 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 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 per cent.
