Portugal, Spain Worry Contagion from Ireland

Article first published as Portugal, Spain Worry Contagion from Ireland on Technorati.

A country, which once recorded more than 30 percent GDP growth, is now threatening European Union for its liquidity problem and soaring debt costs. Though the Ireland authorities are repeatedly telling that they do not need any bailout from the European emergency fund, markets Euro bond yieldare not in a position to believe. It seems they recall the same type of confident announcements by Greece Prime Minister George Papandreou that his country only needed assurances from the EU but not monetary aid. Then, ultimately Greece had to claim the financial aid from the EU and the IMF worth 110 billion euros.

Worries of Portugal and Spain

Finance ministers of Portugal and Spain are worried that Ireland crisis will spread to their countries if the Ireland does not move fast to assure the markets. Portugal’s debt costs are already going up. Spain is also almost ready to follow suit.

Portugal finance minister Fernando Teixeira dos Santos is quoted by BBC as urging Ireland to do the right thing for the Euro and accept bail out. Spain’s Treasury Secretary has also reportedly asked Ireland to act quickly to cool down the market’s worries about uncertainties prevailing on Ireland’s capacity of debt repayment.

EU’s Warning

European Union president Herman Van Rompuy has warned that the failure of the Eurozone is meant to be the failure of EU. He has urged European countries to act together in difficult times, as EU’s existence hinges upon the success of the Eurozone in overcoming the crisis.

It was the European Central Bank that helped Ireland from going bust with its financial aid through buying its debt. Almost all banks of Ireland are now in the hands of the government due to their enormous burden of property loans that were on the verge of default due to financial crisis in 2008. Ireland banks are suffering from liquidity problems also as admitted by its Europe minister Dick Roche.

Germany and France deal

Ireland debt has come under scrutiny after a deal was struck between Germany and France about future bailouts. German government was under pressure from its people that they had to bear the major share of debt burden of those countries that were reluctant to maintain fiscal discipline. Amid Germans’ anger Germany Chancellor was forced to do something to prove that it was no longer ready to share the burden of other Eurozone countries.

So, Germany and France came to an agreement that future bailout would have to be shared by the private bond holders also after 2013 when the present European Financial Stability Facility ends. It was agreed that the countries suffering from debt costs would be allowed to default, or to restructure their debt, which meant that the bond holders might lose part of their money invested in government bonds. Markets panicked with the agreement and began rising debt costs of most indebted countries. Ireland became the first victim of the deal reached between Germany and France.

Of course, Ireland cannot place the total blame on the deal as without their internal problems in their economy, markets need not get panicked. Now Ireland authorities are seeking solidarity from fellow EU members. It remains to be seen how the EU’s meeting to be held in Brussels on Tuesday is going to respond to the latest crisis.

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