20101115, Article, contributied by Juhye, Lyu

Europe Stands By to Steady Ireland By LANDON THOMAS Jr. Published: November 11, 2010 RECOMMEND TWITTER SIGN IN TO E-MAIL PRINT REPRINTS SHARE LONDON — The European Union stands ready to offer a financial lifeline to Ireland, an official said on Thursday, as bond investors apply pressure that threatens to derail Europe's fragile economic recovery. Enlarge This Image Peter Muhly/Agence France-Presse — Getty Images Investor loss of confidence is undermining a recovery beyond Dublin. Enlarge This Image Peter Muhly/Agence France-Presse — Getty Images A stubborn downturn in Ireland and throughout Europe looks daunting given bond market losses and bureaucratic inertia. Investors continued to unload Irish bonds on Thursday, driving up the costs of borrowing for Ireland, as well as some other struggling countries on Europe's periphery. Yields on Irish 10-year bonds surged to 8.9 percent, raising the premium over benchmark German bonds to 6.5 percentage points, the highest level ever. Jose Manuel Barroso, the president of the European Commission, said the bloc stood ready, if needed, to offer financial help for Ireland during its worst economic crisis in decades. "We have all the essential instruments in place in the European Union and euro zone to act if necessary," Mr. Barroso said at the Group of 20 summit meeting in Seoul, South Korea. "The E.U. is ready to support Ireland." Officials in Brussels emphasized that the Irish government had not asked for assistance, as did a spokesman for Jean-Claude Juncker, who is prime minister and former finance minister of Luxembourg and who holds the 30-month presidency of the group of finance ministers from the 16 countries that use the euro. Olivier Bailly, a spokesman for Mr. Barroso in Brussels, said European officials were "carefully assessing the situation on a daily basis" and that "in case of need," the European Stabilization Mechanism, a borrowing facility of 750 billion euros, or $1 trillion, set up last spring in the wake of the Greek debt crisis, would be available. But while European and Irish officials said there was no need for an immediate intervention, some officials are beginning to wonder if the slow drip of bad news, bond market losses and bureaucratic inertia spells a repeat of Greece's long and tortured rescue this year — a process now widely agreed to have added billions of euros to the cost of rescuing Greece. In a research report published Thursday, Jacques Cailloux, an economist at Royal Bank of Scotland, pointed out that banks outside of Greece, Portugal, Spain and Ireland hold 2 trillion euros in debt instruments from these countries, underscoring the risk to the financial system if one or more borrower countries could not repay its debt. Mr. Cailloux argued that the European Central Bank needed to be a more aggressive buyer of bonds from the weak countries. Until then, he wrote, even a bailout of, say, Ireland or Portugal would not prevent a wider panic spreading to Spain, which has the fourth-largest economy in the euro zone, trailing Germany, France and Italy. "Does the E.C.B. understand the concept of contagion?" he asked. Along with Ireland, risk premiums widened on Portuguese, Greek and Spanish bonds as investors bet that at some point the concerns would indeed spread, as they did early this year in the wake of Greece's financial troubles, and require action by the European Union. In Greece, where bond yields spiked to 11.6 percent, investors were worried about reports that it would miss its budget deficit target of 8.1 percent of gross domestic product for 2011 because tax revenue would be weak. Greek government officials have privately acknowledged that they will miss the target. The tenuous nature of Europe's economic prospects was underlined Thursday by data showing that Spain had virtually no growth in the third quarter as demand continued to suffer. Irish government officials have said that the fluctuations of bond yields and credit-default swaps, however volatile, will not drive them to a Greek-style international rescue. They assert that Ireland has sufficient cash reserves and will not need to borrow again until spring. "We are sitting on 22 billion euros," said one Irish official who was not authorized to speak about the financial situation. "It does not make sense for us to ask for any help. They would just say, 'Why are you bothering us?' " Still, as Irish bond yields approached 9 percent, the finance minister, Brian Lenihan, acknowledged the gravity of the matter. "The bond spreads are very serious, and there is international concern throughout the euro zone about that," he said Thursday in Dublin. Mr. Lenihan attributed the bond market rout in part to a German push for a mechanism that would make private bondholders take their share of the losses in any future debt restructurings, along with taxpayers. The Irish government is desperately trying to cobble together a four-year plan to show that it is serious about bringing the deficit — now at 32 percent of gross domestic product, including the one-time bill for failed banks — down to 3 percent by 2014. While a plan could be announced next week, government officials say the following week is more likely. Economists say the Irish government cannot afford to run its cash down to zero and then come to the market. "They keep saying they have enough money to last until July, but the reality is that they will have to return to the markets no later than February," said Colm McCarthy, an economist at University College Dublin. Ireland or other governments can obtain payouts from the European Stabilization Mechanism by submitting a request to the European Central Bank and to the European Commission. The commission would then need to make a formal proposal to European governments to grant the money. Governments make the final decision, with a vote by qualified majority to reflect the size of the bloc's 27 countries. That decision would determine the maximum amount of assistance as well as its cost, duration and the number of installments. The next official meeting of euro zone finance ministers is scheduled for Tuesday. James Kanter contributed reporting from Brussels.