Pressure builds on Ireland as investors dump bonds

Associated Press
Ireland's Health Minister Mary Harney is seen after she was pelted with a paint-filled balloon during the opening of a new mental health facility in west Dublin, Monday, Nov. 1, 2010. Ireland's health minister has been pelted with red paint as tempers grow over government plans to slash euro1 billion (US$1.4 billion) from the costs of running an overloaded hospital network. (AP Photo/Niall Carson, PA) ** UNITED KINGDOM OUT  **

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Ireland's Health Minister Mary Harney is seen after she was pelted with a paint-filled balloon during …

Ireland's finances came under intensifying pressure Thursday as the government — fighting to keep its majority and avoid an election — prepared to unveil another round of budget cuts expected to be the biggest in Irish history.

Investors again dumped Irish bonds, reflecting their skepticism that Ireland can rapidly reverse its huge budget deficit without driving its economy deeper into recession.

The interest-rate premium demanded by investors to buy Ireland's depreciating bonds has doubled in two months and reached a new modern high again Thursday, jumping to 7.7 percent versus 7.45 percent a day earlier.

Ireland's woes come as a Europe-wide government debt crisis shows signs of flaring up again. Bond market turmoil was calmed earlier this year after the European Union and the International Monetary fund put up euro110 billion to keep Greece from defaulting on its debts, and eurozone countries set up a $1 billion financial backstop for troubled governments.

But in recent days financially shaky members of the euro zone have seen their borrowing costs rise amid investor skepticism that they can avoid defaulting on debts in the long run. Such doubts have been partly fueled by recent calls from German Chancellor Angela Merkel for new European Union debt-crisis rules that would include requirements that bondholders share the burden when the EU next intervenes to restructure a euro-zone member's debts.

The measures used to get debt under control — budget cuts and tax increases — have prompted concerns they will undermine any economic recovery. Slacker economies would hurt tax revenue and make it harder to repay bonds when they come due.

Spain and Portugal this week have paid hefty yield premiums to auction new bonds this week, although the markets still rate both countries as less-risky debtors than Ireland.

Later Thursday, Irish Finance Minister Brian Lenihan plans to unveil growth forecasts for 2011-2014 and the planned size of spending cuts and tax increases in 2011.

Government advisers have guided the cut figure ever higher in recent weeks from euro3 billion, then euro4.5 billion to, most recently, more than euro5.5 billion ($7.75 billion). Many analysts doubt that Ireland can cut so much, so soon, without crippling its hopes of returning to even tepid growth in 2011.

Dublin-based Glas Securities said in a note to investors it was curious to see whether Lenihan "gives any insight into how the government can simultaneously create an economic stimulus over the same period, something which the austerity skeptics will focus on closely."

Government chief whip John Curran noted that, even if Ireland were to slash euro6 billion from its 2011 deficit through spending cuts and tax hikes, the country still would have to borrow billions more to pay its bills.

Curran said the government's overriding goal must be to reassure international investors, who currently are driving the cost of government borrowing to unsustainable highs on the bond markets. Ireland, with cash reserves due to run out in mid-2011, has suspended its new bond auctions until early 2011, when it hopes the yields on its bonds will have fallen back below 5 percent.

Lenihan plans to publish a plan in mid-November that charts a four-year path from Ireland's current deficit horrors back to 3 percent of GDP — the European Union's deficit limit for euro-zone members — in 2014. The 2010 deficit is projected to reach an astonishing 32 percent, chiefly because of exceptional costs from a euro45 billion bank-bailout program.

Lenihan then plans to publish the full 2011 budget Dec. 7. But its passage in parliament is far from certain, given that Prime Minister Brian Cowen commands a dwindling majority that includes several lawmakers wavering over the size of cuts planned to health care, welfare and pensions.

As lawmakers opened debate Thursday, opposition leaders barraged Cowen relentlessly with demands for four empty parliamentary seats to be filled through by-elections. The speaker tried to rule the questions out of order, then suspended debate as tempers reached breaking point.

The government has already conceded it expects to lose all four contests, shattering Cowen's ability to win parliamentary votes, and so has sought to delay holding any by-elections until after the budget is passed. Cowen currently commands 82 votes in the 161-member Dail Eireann, Ireland's parliament.

Ireland's second-highest court ruled Wednesday that the government was violating the constitution by imposing unreasonable delays on by-elections, specifically in the northwest Irish constituency of Donegal South West, where a post has been left vacant for 17 months.

Cowen responded by agreeing to permit the Donegal by-election later this month. But Cowen added — to uproar from opposition benches — that the government would keep delaying the other three pending its appeal of Wednesday's judgment to the Supreme Court.

"The government is using the judicial process to thwart the democratic process," declared lawmaker Caoimhghin O Caolain of Sinn Fein, the Irish nationalist party that successfully sued the government to force the Donegal South West by-election. Sinn Fein, a strident critic of the government's economic policy, is favored to win that contest.

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