DUBLIN/LONDON (Reuters) - A top EU official failed to forge a consensus on an austerity budget between Ireland’s shaky government and opposition on Tuesday as investors weighed the risk of a second euro zone state requiring help with crushing debts.
The political impasse in Dublin, and worries about a key Portuguese debt auction on Wednesday unnerved markets, sending the risk premium on Irish and Portuguese bonds to record highs, and prompting market talk of European Central Bank intervention.
Irish opposition parties, eager to force out Prime Minister Brian Cowen’s unpopular administration, rebuffed a call for fiscal unity by visiting European Economic Affairs Commissioner Olli Rehn.
“He asked us our view and I told him ... we had no confidence in this government, and the thing that would give more stability to the country is an election and a government in place that had a significant working majority,” said Michael Noonan, finance spokesman for the center-right Fine Gael party.
Ireland’s debt burden and budget deficit have been swollen by up to 50 billion euros ($69.57 billion) in liabilities for bank lending guaranteed by the government after a real estate bubble burst in 2008 during the global financial crisis.
Two days before leaders of the G20 major world economies meet in Seoul, Rehn said he was fire-fighting to prevent any potential crisis threatening the stability of the 16-nation single currency area. He appealed for bipartisan support for a 15-billion-euro austerity package over the next four years.
Cowen’s government, which has seen its majority dwindle in parliament and now faces a risky by-election, has yet to spell out details of savage spending cuts and tax increases.
Fears that Ireland, which is fully funded until mid-2011, may need a Greek-style bailout have sent its borrowing costs spiraling higher over the past week.
But Rehn told Irish national broadcaster RTE that markets should calm once they saw detailed austerity measures adopted.
“I believe that the markets have not yet internalized this plan and these decisions because they are still at the planning stage,” he said. “Once they have been decided by the government and passed by the parliament they will have a real effect, and then the market forces (will) believe that Ireland is able to cope.”
Markets are also repricing the risk of peripheral euro zone sovereigns after Germany convinced its EU partners to accept in principle a treaty change to make bond holders share the pain in any future debt restructuring in the euro area.
“With this kind of talk from Germany, we are heading toward putting some bond markets into a prolonged period of cold storage, a la Greece,” said Societe Generale rate strategist Ciaran O‘Hagan.
The Irish yield spread over benchmark German bunds reached a record peak near 574 basis points in late trading. The 10-year Portuguese/Bund spread also hit a euro lifetime high of 466 basis points and traders said the ECB had been buying bonds.
Credit ratings agency Fitch Solutions said the cost of insuring Irish and Portuguese sovereign debt against default had widened by 24 and 22 percent respectively compared to the sovereign debt market average in the last week.
On the eve of a 1.25 billion euro issue of 5- and 10-year bonds, Portugal’s finance minister promised his country would not hesitate in cutting its budget deficit.
The minority Socialist government and the center-right opposition reached a deal to enable the broad outlines of an austere 2011 budget to pass through parliament last week, but details of spending cuts remain to be finalized.
“The Portuguese have already understood, and the markets can be reassured, that this is the way forward, and one that will be followed without hesitation so as to ensure that the country will continue to be regularly financed in the international financial markets,” Finance Minister Fernando Teixeira dos Santos said in an emailed statement to Reuters.
In recent months, spreads have often widened in the run-up to peripheral euro zone countries’ debt auctions, only to narrow after the auction is well bid.
additional reporting by Paul Day in London and Axel Bugge in Lisbon, writing by Paul Taylor; Editing by Charles Dick