DUBLIN (Reuters) - Ireland’s finance ministry and the International Monetary Fund sought to calm markets on Friday after a newspaper report on the possibility of an IMF bailout sent investors running for cover.
The cost of insuring Irish sovereign debt against default hit a record high and the Irish/German spread reached a euro lifetime peak after the Irish Independent newspaper said Ireland was “perilously close” to calling in the IMF and the EU.
The IMF told Reuters it did not foresee that its financial assistance would be needed for Ireland and praised Dublin’s efforts at propping up its banking system.
Ireland’s Department of Finance slammed the Irish Independent article.
“There is absolutely no truth to a rumor concerning external assistance. It is based on a local misinterpretation of a research report,” a spokesman said in a statement.
The newspaper used a report from Barclays Capital as the basis for the article. Barclays said Ireland’s liquidity position was comfortable but if unexpected banking losses emerged or economic conditions deteriorated outside help may be needed.
“The report is a lot more measured than what has been reflected in the newspaper,” said Geraldine Concagh, a senior economist in Allied Irish Banks. “The market is very nervous at the moment.”
A combination of costly bank bailouts, anemic growth and the worst budget deficit in the EU have stoked fears of a full-blown debt crisis and Finance Minister Brian Lenihan is under pressure to ramp up efforts to get the finances in order.
Earlier this week, Lenihan said a 3 billion euros fiscal adjustment target for the 2011 budget was a minimum but his junior coalition Green Party colleagues want that to be the maximum, setting them on a potential collision course.
“We hope that it will be kept to 3 billion and we will be doing our very best (to keep it at 3 billion),” Mary White, the deputy leader of the Green Party, told national broadcaster RTE.
The government has a wafer-thin majority in parliament and already faces a tough task selling more austerity measures to an angry electorate.
The government’s difficulties were heightened by Prime Minister Brian Cowen, who on Friday said he would socialize more cautiously after being forced to apologize this week for a stumbling media performance given just hours after he finished partying with colleagues at an annual conference.
Analysts say this year’s budget deficit could reach around 25 percent of gross domestic product (GDP) including the one-off costs associated with bank bailouts.
Even without the one-off bank bill, the shortfall is still expected to be around 10 percent next year on an underlying basis, over three times an EU limit of 3 percent, according to the latest Reuters poll.
“It really is in the government’s court to deliver on the goods. Most other countries already have their budgets in place,” said Ciaran O’Hagan, strategist with Societe Generale.
The Irish credit default swap, a gauge of the cost of insuring the sovereign’s debt against default within five years, hit a record high of 425 basis points, about 38 bps up on the day, according to CDS monitor Markit.
The Irish 10-year bond yield climbed to highs around 6.5 percent, driving the yield premium that investors demand over German Bunds up to 410 basis points, up 31 bps on the day and a euro lifetime high..
Ireland’s liquidity position — it is funded into the second quarter of next year — has eased concerns over a possible default but an auction of up to 1.5 billion euros in bonds on Tuesday will be a big test of investor sentiment.
This week, Spain easily sold 4 billion euros of long-term debt suggesting investor faith in that country was rising.
But for Ireland, analysts have said that until a final price is put on the cost of bailing out nationalized lender Anglo Irish investors will continue to be extremely wary.
The financial regulator is expected to come up with the capital cost of dealing with Anglo Irish around the beginning of October. So far, Dublin has said it will have to pump up to 25 billion euros, or 15 percent of GDP, into the lender, with payments spread out over at least a decade.
Additional reporting by George Matlock and Ian Chua in London and Lesley Wroughton in Washington; editing by Mike Peacock