Reuters | Sep 17, 2010 | 10:22pm IST
Ireland’s finance ministry and the International Monetary Fund sought to calm markets on Friday after a newspaper report on the possibility of an IMF bailout sent investors running for cover. The cost of insuring Irish sovereign debt against default hit a record high and the Irish/German spread reached a euro lifetime peak after the Irish Independent newspaper said Ireland was "perilously close" to calling in the IMF and the EU. The IMF told Reuters it did not foresee its financial assistance would be needed for Ireland and praised Dublin’s efforts at propping up its banking system. Ireland’s Department of Finance slammed the Irish Independent article. "There is absolutely no truth to a rumour concerning external assistance. It is based on a local misinterpretation of a research report," a spokesman said in a statement.
The newspaper used a report from Barclays Capital as the basis for the article. Barclays said Ireland’s liquidity position was comfortable but if unexpected banking losses emerged or economic conditions deterioriated outside help may be needed. "The report is a lot more measured than what has been reflected in the newspaper," said Geraldine Concagh, a senior economist in Allied Irish Banks. "The market is very nervous at the moment." A combination of costly bank bailouts, anaemic growth and the worst budget deficit in the EU have stoked fears of a full-blown debt crisis and Finance Minister Brian Lenihan is under pressure to ramp up efforts to get the finances in order.
Earlier this week, Lenihan said a 3 billion euros fiscal adjustment target for the 2011 budget was a minimum but his junior coalition Green Party colleagues want that to be the maximum, setting them on a potential collision course. "We hope that it will be kept to 3 billion and we will be doing our very best (to keep it at 3 billion)," Mary White, the deputy leader of the Green Party, told national broadcaster RTE. The government has a wafer-thin majority in parliament and already faces a tough task selling more austerity measures to an angry electorate.
The government’s difficulties were heightened by Prime Minister Brian Cowen, who on Friday said he would socialise more cautiously after being forced to apologise this week for a stumbling media performance given just hours after he finished partying with colleagues at an annual conference. Ireland’s liquidity position — it is funded into the second quarter of next year — has eased concerns over a possible default but an auction of up to 1.5 billion euros in bonds on Tuesday will be a big test of investor sentiment. This week, Spain easily sold 4 billion euros of long-term debt suggesting investor faith in that country was rising.