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A reeling bond market has EU members pushing for Ireland bailout

An Ireland bailout is possible after government bonds tumbled in recent weeks. The country is under pressure to accept a $100 billion bailout that could prove a bitter pill for the former 'Celtic Tiger.'

By Staff writer, Correspondent / November 15, 2010

A street vendor sells silver in central Dublin, Ireland, on Nov. 12.

Peter Morrison/AP

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Paris and Dublin

European nations were slow to bail-out bankrupt Greece last spring but are now pressing debt-addled Ireland to take a $100 billion stability fund check over Irish objections.

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The government insists it has the funds to cover Ireland's debts till next summer and insists it will find more conventional ways to avoid default beyond then. As a stop-gap, it's seeking a smaller amount of EU aid that won't be accompanied by tough limits on government spending and a potential increase in low corporate tax-rates that helped fuel the high-flying "Celtic Tiger" economic model that has come crashing down in recent years.

The issue will heat up tomorrow ahead of an EU finance ministers' meeting on preventing the bad-debt crisis that has hobbled the Irish economy from spreading to larger eurozone countries like Spain and Italy, which have debt problems of their own.

Whether Ireland will get its way remains to be seen. EU officials have been discussing a bailout in the wake of a 13-day Irish bond-sell off that only eased at the end of last week. Since June, the yield on Ireland's benchmark 10-year bond has increased from below 5 percent to about 8 percent, reflecting a dramatic increase in investor fears of an Irish default. In recent weeks the yield has been as high as 9 percent -- a record since Ireland adopted the euro in 1999.

Stephen Kinsella, an economist at the University of Limerick, says bending to a full loan bailout is “more than likely going to happen,” but warns that could drive yields even higher in the short term, as investors fret that the terms of a bailout will require current investors to to lose some of their principal. "A potential bailout would cause spreads to explode and make the state – and state-owned banks – unable to borrow,” he says.

The pressure on Ireland mounted today, with European Central Bank member Miguel Angel Fernandez Ordonez telling reporters in Madrid that “the situation in the markets in recent weeks has been very negative due… to the lack of a final decision by Ireland.”

Housing bubble

Unlike Greece, which stunned markets when it admitted its economic statistics were fabricated and had been concealing the fact that it was nearly insolvent – Ireland’s problem comes from bad bank loans associated with a housing bubble. Ireland has been forthrightly repaying its debt for two years in full public view and has pumped $47 billion of taxpayer money into the Anglo-Irish bank since 2009, even as it instituted terrific budget cuts.

Next year federal spending is slated to fall by $8 billion, and by $12 billion by 2014. The crisis has raised the Irish deficit to 32 percent of GDP.

Irish finance ministry officials reiterated today that no “application” has been made to tap the eurozone stability fund created May 9 in the wake of the Greek crisis: "The Irish government continues its work on the four-year budgetary plan and budget for 2011. Ireland is fully funded till well into 2011," a spokesman told the Associated Press.

But the issue for Germany, which has exerted significant influence in the crisis, and for France, is whether Ireland can actually finance its debt until next July, as it has said.

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