No risk of euro zone breakup in Irish crisis: EU

BERLIN/PARIS (Reuters) - Senior euro zone officials dismissed any risk of the single currency area breaking up after financial markets, alarmed by Ireland’s debt crisis, forced the borrowing costs of Portugal and Spain to record highs.

“There is zero danger,” Klaus Regling, chief of the euro’s financial safety net, European Financial Stability Facility (EFSF), told German daily Bild in an interview published on Thursday when asked if the euro zone could break apart.

“It is inconceivable that the euro fails,” he said.

Some economists and commentators, mostly in Britain and the United States, have suggested the 16-nation common currency launched in 1999 could split because of peripheral members’ high debts and deficits, and a loss of competitiveness with Germany.

But Regling said: “No country will give up the euro of its own will: for weaker countries that would be economic suicide, likewise for the stronger countries. And politically Europe would only have half the value without the euro.”

Greece received a three-year 110-billion-euro EU/IMF bailout in May, leading to the creation of the EFSF, which Ireland has now applied to tap to cope with the devastating impact of a banking crisis on its public finances.

The cost of insuring Irish debt against default continued to rise on Thursday amid market doubts about Dublin’s austerity plan. In another sign of waning confidence, European clearing house LCH.Clearnet increased the deposit it requires traders in Irish government bonds to post for the third time this month.

The euro tumbled this week after German Chancellor Angela Merkel alarmed markets by saying the single currency was in an “exceptionally serious” situation.

German Bundesbank chief Axel Weber, a powerful member of the European Central Bank’s governing council, said he was convinced EU leaders would do whatever it takes to repel what he called an “opportunistic attack” on the currency area.

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Weber noted that the EFSF and other EU rescue funds had enough money, if necessary, to cover the borrowing needs of the four financially troubled members of the euro zone -- Greece, Ireland, Portugal and Spain.

“If that is not enough, I am convinced euro zone states will do what is necessary to protect the euro,” Weber told French business and political leaders in Paris on Wednesday evening. “But 750 billion (euros) should be more than enough to see off an attack on the euro zone.”

Currency and credit markets have been unnerved by German proposals to force bond holders to share the cost of any future default by highly indebted euro zone countries, as well as by the alarmist tone of recent comments by Merkel and European Council President Herman Van Rompuy.

ECB policymaker Ewald Nowotny voiced irritation at Merkel for not “differentiating between the euro as a currency and the problems of individual (euro zone) states.”

Euro zone policymakers are hoping that Spain and Portugal can stave off an Irish- or Greek-style debt meltdown.

A Reuters poll this week showed 34 out of 50 analysts surveyed believe Portugal will be forced to follow Ireland and ask for help. In a separate survey only four out of 50 economists thought Spain would seek external aid.

“Of course the situation is serious,” Regling said when asked about Merkel’s comments. But Regling said there was no way France and Italy were in danger.

“Italy has come through the crisis well and has its state deficit in hand. And France has the same credit standing as Germany,” he added.

A woman walks past graffiti depicting Ireland's Finance Minister Brian Lenihan and Prime Minister Brian Cowen as the Blues Brothers Dublin, November 24, 2010. REUTERS/Cathal McNaughton

To help a euro zone country, the EFSF would issue bonds on the market which would be backed by up to 440 billion euros ($585.9 billion) worth of guarantees from euro zone governments.

Regling said he had spoken about such issues with 150 of the largest investors in the world including sovereign funds, pension funds, central banks, insurers and commercial banks.

“They are all very interested,” he said.

Ireland’s government faced the first electoral backlash from a tough austerity package that will cut wages and welfare benefits and raise taxes when voters cast ballots in a by-election in the northwestern county of Donegal on Thursday.

Irish Prime Minister Brian Cowen’s four-year plan for tackling the worst budget deficit in Europe failed to impress investors or calm fears that Ireland’s woes may tip other euro zone nations into crisis.

The 15 billion euros ($20 billion) in spending cuts and tax increases unveiled on Wednesday will form the basis for an IMF/EU rescue package worth about 85 billion euros.

But the measures, including cuts to the minimum wage and thousands of job losses, are likely to seal defeat for Cowen’s Fianna Fail party in the poll for a vacant parliamentary seat in Donegal and result in Cowen’s majority shrinking to just two.

With Cowen’s coalition imploding amid public fury at having to go cap in hand to the IMF and the EU, the Donegal vote raises the risk that the 2011 budget, the first step in the four-year plan, may not make it through parliament on December 7.

Failure to get next year’s budget passed would turbo-charge the crisis in Ireland and Europe and analysts have said the main opposition parties may abstain from voting to allow the budget through if it looks like Cowen cannot get the numbers.

Even excluding the political uncertainty surrounding the 2011 plan, investors are skeptical the fiscal targets can be achieved with rating agency Standard & Poor’s dismissing the 2.75 percent annual growth assumptions underlying the strategy as too optimistic.

additional reporting by Carmel Crimmins in Dublin, William James and Anna Yukhananov in London; writing by Paul Taylor, editing by Peter Millership