DUBLIN - Shares in Ireland's banks fell to record lows Monday and borrowing costs were near euro-era highs as the government prepared to discuss its fiscal survival plans with top European Union officials.
Although Ireland is not at immediate risk of bankruptcy, investors are shunning government and bank debt out of fear that the country is at growing risk of requiring a bailout by the EU and International Monetary Fund, like Greece received in May.
The battered shares of Allied Irish Banks, Bank of Ireland and Irish Life & Permanent all have been dropping on the Irish Stock Exchange since Finance Minister Brian Lenihan last week announced plans to slash euro6 billion (US$8.35 billion) from its 2011 deficit, double his previous target. His goal is to reduce the 2011 deficit to 9.5 per cent of GDP from its projected 2010 rate of 32 per cent, a modern European record.
Allied Irish was down 3 per cent to euro0.26, Bank of Ireland 13 per cent to euro0.37, and Irish Life & Permanent 16 per cent to euro0.88. The first two banks have received billions in state aid because of their dud loans to bankrupt construction tycoons, while Irish Life & Permanent has received no bailout help but is most exposed to Ireland's depressed market for residential property.
Olli Rehn, European Commissioner for financial affairs, is meeting Lenihan in Dublin on Monday night and will then meet opposition politicians and business and labor union leaders Tuesday.
Many analysts are questioning whether Ireland's deepening austerity efforts will be sufficient to persuade foreign banks to buy Irish government and bank bonds again at reasonable rates. If not, Ireland will face a growing risk of default in 2011 that can be relieved only by taking emergency aid from Europe's Financial Stability Fund.
The government in September withdrew temporarily from the bond market, arguing that investors were demanding punitive interest rates. Lenihan expressed hopes that investors' confidence in Ireland would grow before the government needs to re-enter the market in early 2011. The country says it has sufficient funds to pay its bills through April and also could tap its pension reserve fund.
So far the approach has failed as the interest rates, or yields, on Irish 10-year treasuries has reached a series of highs in recent weeks reflecting investors' growing belief that Ireland is running out of time to avoid a default or bailout.
As the traditional owners of Irish treasuries -- chiefly banks in Britain, Germany, the United States and France -- seek to dump them because of their falling value and increased perceived risk, new sellers can be attracted only by offering higher yields.
Irish 10-year bonds were trading Monday at average yields of 7.75 per cent -- just off the euro-era high of 7.82 per cent reached last week -- and at a 5.3 per cent spread versus equivalent German bonds.
