EU ministers reassure Irish debt investors

[November 12, 2010]  LONDON (AP) -- Ireland's debt crisis eased a notch Friday after European governments reassured investors that new, tougher terms for bailouts will not expose them to higher costs on their current holdings.

Traders have been dumping Ireland's sovereign bonds on fears the government will be unable to manage its outsized banking crisis and that new EU rules being discussed will force investors to take on heavier losses in case of a bailout.

Ireland's borrowing cost hit a new euro-era high on Thursday, prompting the finance ministers of several fellow eurozone countries to gather for impromptu talks on the sidelines of the Group of 20 summit in Seoul, South Korea.

The EU's proposed new bailout mechanism "does not apply to any outstanding debt," the finance ministers of Germany, France, Italy, Spain and Britain stressed in a joint statement Friday.

"Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements," they said.

Ireland's 10-year bond yield fell to 8.25 percent in Dublin Friday, from 8.87 percent on the open and Thursday's record high of 8.95 percent. Bond yields and prices move in opposite directions.

After saving Greece from bankruptcy in May, the EU set up the European Financial Stability Facility, a euro750 billion ($1.03 trillion) backstop for any other countries that might need support. Since then, Germany has been pushing to modify rules about who bears the cost of the bailouts in an effort to protect taxpayers in less profligate countries.

Fears over those new rules and confusion about when they might come into force have pushed investors in recent weeks to sell off government bonds in heavily indebted countries, mainly Ireland but also Portugal and Spain.

Analysts at Glas Securities in Dublin say that lack of full understanding of the bailout mechanism "has in itself added considerably to the 'fear of the unknown' and consequent rise in Irish yields."

"Market participants will still probably have to accept that the issue will drag on for some time but have this morning received a reassurance that the final outcome is unlikely to be as penal as initially feared," the analysts said in a note to investors.

Brian Lenihan, Ireland's finance minister, welcomed the clarity and solidarity provided by his EU counterparts.

He ruled out any change in private investors' exposure to the current debt problems and said in a statement that the "EU partners have confirmed their full confidence in the budgetary strategy being pursued by the government."

[Associated Press; By CARLO PIOVANO]

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