Ireland’s bonds reach new euro-era high on debt worries, rumors of government instability

Irish borrowing costs at new high on debt worries

DUBLIN — Ireland’s cost of borrowing reached its highest point in the euro era Monday as investors sold off government bonds on speculation of financial and government instability.

The interest rates on Irish 10-year bonds surpassed 6.5 percent on the eve of a major auction of new Irish treasuries. Fears were exacerbated as Cabinet ministers denied any move to replace Prime Minister Brian Cowen over his recent stumbling media performances.

The gap between Irish and German bonds — the benchmark of lending safety in the 16-nation euro zone — also exceeded 4 percentage points Monday for the first time since the common currency’s launch in 1999.

The previous record high for Irish bonds was 6.35 percent reached Friday when Dublin media reports fanned fears of a growing risk of an International Monetary Fund bailout. Bond interest rates rise as prices fall, and higher rates mean dwindling confidence in a borrower. Higher rates also make it more expensive to borrow money and can hurt state finances.

The IMF and Irish officials have dismissed fears of an Irish default or emergency rescue, but the rising interest rates demonstrate that investors see increased risk in lending to the heavily indebted government. Ireland is currently rated the sixth-riskiest national borrower, just ahead of Portugal and Iraq.

Dublin-based analysts said investors were selling Irish bonds heavily in advance of Tuesday’s planned auction of €1.5 billion ($2 billion) in new 4-year and 8-year issues. They expect the European Central Bank — which already owns more than €16 billion in Irish bonds, representing a fifth of Ireland’s national debt — to help ensure that the bonds are fully purchased.

While some foreign analysts say Ireland could seek aid from the emergency EU-IMF fund if its recession-battered economy worsens, local analysts say such speculation ignores Ireland’s current funding abilities.

An Irish investment fund, Glas Securities, said in a note to investors that Ireland has already secured sufficient funds for the rest of the year and also retains immediate cash reserves exceeding €20 billion.

“Reports that Ireland may be forced to call on aid from the EU and IMF are overstated in our view,” Glas Securities said, arguing that the government would turn to its cash reserves “before even considering any calls to the EU/IMF.”

Several Cabinet ministers rallied to Cowen’s defense Monday after Tom Kitt, a lawmaker in his ruling Fianna Fail party, said he should agree to step down as leader or be ousted if he refuses.

Kitt argued that Cowen’s often glum, aggravated speaking style — and recent televised apology for one particularly poor national radio interview — was failing to inspire public understanding or support for Ireland’s efforts to support its banks or slash its deficit.

But the most likely candidate to succeed Cowen, Finance Minister Brian Lenihan, said he wasn’t interested in replacing Cowen, only in pulling Ireland out of its financial difficulty.

“Certainly nobody has suggested to me that I should make a move,” Lenihan said.

And Justice Minister Dermot Ahern, another potential leadership candidate, said Ireland couldn’t afford to change leaders now.

“The last thing we need at this time is upheaval in the government or our party. It just won’t help the country,” Ahern said.

Ireland enjoyed more than a decade of Europe-leading growth, but the Celtic Tiger economy has plummeted since its central pillar — a boom in construction and property speculation — collapsed in 2008. The recession has slashed government tax collections, driven unemployment to a 16-year high, and fueled a surging deficit that could exceed 20 percent of GDP this year.

Cowen is committed to slashing another €3 billion from the deficit in the 2011 budget even though such cuts risk weakening Ireland’s already slack economy. He has already imposed two years of similar cuts and tax rises that have slashed household incomes across this nation of 4.5 million.

Irish Central Bank governor Patrick Honohan told a conference on European monetary policy Monday that Cowen has no choice but to cut even more than €3 billion in December’s budget plans. He said international investors need to see Ireland’s tax collections and spending placed “on a convincingly convergent path,” otherwise the interest on government borrowing would remain too high.