FLASHBACK: Paulson to Congress: There will be MARTIAL LAW in America if the bailout is not passed
RELATED: Contagion hits Portugal as Ireland dithers on Rescue
Henry McDonald, Elena Moya and Larry Elliott
London Guardian
November 15, 2010
An increasingly isolated Irish government was coming under mounting pressure tonight to seek an EU or International Monetary Fund bailout within 24 hours amid fears that contagion from its crippled banking sector might spread through the weaker eurozone countries.
Portugal, Spain, the European central bank and opposition parties urged Brian Cowen’s coalition government to remove the threat of a second crisis in six months by putting a firewall between Ireland and its 15 partners in the single currency.
With finance ministers from the eurozone due to hold emergency talks tomorrow night, financial markets were expecting Dublin to finalise negotiations with the EU over the terms of a deal to allow Ireland to rescue banks laid low by the collapse of the country’s construction boom.
“The Irish problem is spreading, but it could get more volatile,” said Ashok Shah, chief investment officer at London Capital, a fund management firm. “They have to get this bailout, they have a period of time before it gets impossible, before nasty things happen. The longer they leave it, the more difficult it will get.”
Portugal has seen its borrowing costs rocket along with Ireland's as speculation has grown that it too may have to consider a bailout. Its finance minister, Fernando Teixeira dos Santos, told the Wall Street Journal his country had been hit by a contagion effect caused by fears about Ireland's ability to pay its debts.
"I would not want to lecture the Irish government on that," he said. "I want to believe they will decide to do what is most appropriate for Ireland and the euro. I want to believe they have the vision to take the right decision."
The Bank of Spain governor, Miguel Ángel Fernández Ordóñez, a member of the European Central Bank's governing council, told a banking conference in Madrid he expected an "appropriate reaction" by Ireland to calm the markets. He later told reporters: "The situation in the markets has been negative due in some part to the lack of a decision by Ireland. It's not up to me to make a decision on Ireland, it's Ireland that should take the decision at the right moment." Ewald Nowotny, another ECB governing council member, said in a radio interview the EU wanted a "quick, good solution to Ireland, so that there will be no spillover" to other heavily indebted countries such as Portugal and Spain.
Weekend reports that Ireland was holding bailout talks with the EU helped ease pressure on Irish borrowing costs today, with the yield on benchmark 10-year Irish bonds easing to 8.1% from a peak of over 9% last week. The premium that investors demand to hold Irish 10-year bonds over benchmark German bunds (known as the spread) also fell to 545 basis points, down from a record 652 basis points last Thursday.
Analysts warned, however, that the selling would quickly resume if Ireland tried to go it alone. "The expectation of a bailout for Ireland helped its spreads to recover from last week's capitulation," said Gavan Nolan, a credit analyst at Markit. "It's good to talk." Despite Ireland's insistence that it doesn't need to be rescued, investors say the country needs support, given the fragility of its moribund banking system, and the high borrowing costs limiting the capacity of companies to raise funds.
Ireland's Europe minister, Dick Roche, said rumours that it was on the verge of seeking a bailout could be "very, very dangerous".
He conceded: "There is continuous talk going on backwards and forwards about the level of our debt but the suggestion that that constitutes going to the IMF or the bailout is just irresponsible." Ireland's opposition finance spokesman, Michael Noonan, said he believed European intervention was "under way" and matters would come to a head within 24 hours. The government, he said, was "fighting a rearguard action for appearances purposes".
Noonan said a bailout could lead to Ireland being suspended from the bond markets for three or four years.
