Irish crisis, contagion fears loom over EU meeting

[November 16, 2010]  BRUSSELS (AP) -- Ireland's debt crisis, and the question of if and how it would be bailed out to avoid a domino effect that could topple other vulnerable nations like Portugal, is set to dominate a meeting of European finance ministers Tuesday.

The 16-country eurozone has been shaken by concerns that Ireland will not be able to endure high debt levels and that a rescue might be necessary to soothe jittery investors. Market tensions are making borrowing more expensive for countries like Portugal, threatening to spread the crisis across the region.

The interest rate, or yield, on Irish bonds inched up again Tuesday, suggesting greater worries among traders even though Dublin repeatedly rejected reports that it would need to tap the eurozone's euro750 billion ($1 trillion) financial backstop. In early afternoon trading, the yield on Ireland's 10-year bonds reached 8.14 percent, up from 7.98 percent at the open.

Ireland is struggling to slash a budget shortfall that will likely balloon this year to a staggering 32 percent of GDP -- a record for postwar Europe. The government's budget dropped deep into the red after its euro45 billion rescue of five banks that were hit hard when the country's real estate bubble burst in 2008.

While well below last week's record of 8.95 percent, the high yields signal that confidence in Ireland's ability to repay its debts is still low and that it will have a hard time raising money once it has to return to the markets some time next year. Dublin has said that it has enough money to fund itself until the middle of 2011.

The surge in yields has pushed the EU back into the depths of crisis management, after they had spent their recent gatherings focusing on crisis prevention.

In an interview with French newspaper Le Figaro published Tuesday, Greek Prime Minister George Papandreou insisted his country won't default on its euro298 billion ($406 billion) in debt because doing so would be a "catastrophe" for Greece, Europe and the euro.

On Monday, Greece said this year's deficit would likely reach 9.4 percent, well above the 8.1 percent level it forecast earlier this year when it received a euro110 billion ($140 billion) bailout from European partners and the International Monetary Fund.

Portugal, which is struggling with high budget deficits, also saw itself forced to deny rumors that it would seek financial assistance.

"Portugal has made no official or informal contacts with a view to seeking European aid," Finance Minister Fernando Teixeira dos Santos said in an interview Monday with financial newspaper Jornal de Negocios. But he added that "if Ireland's situation deteriorates" the market pressure on Portugal would increase.

[Associated Press; By GABRIELE STEINHAUSER]

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