Published November 17, 2014
Europe's government debt crisis intensified Thursday as worries grew that the continent's most financially troubled countries, mainly Ireland and Portugal, will need a bailout to avoid bankruptcy just as Greece did earlier this year.
Ireland was the epicenter of the latest shockwave through Europe's financial system, with fears growing that its bank bailout — the world's costliest when measured per capita — will overwhelm the country's finances and force the government to seek a financial rescue from its partners in the shared euro currency.
The price investors demand to hold the debt of Ireland hit new euro-era highs on Thursday, with the yield on a 10-year bond almost reaching 9 percent. The benchmark German rate, by comparison, was almost 7 percentage points lower.
Those high yields are both signs of market fear and a big problem for the Irish government, as it indicates how expensive it will be for it to borrow the next time it needs to. Experts warn that that the high rates have effectively shut Ireland out of credit markets as traders increasingly believe the goverment will soon be forced to tap an emergency fund for eurozone nations facing bankruptcy.
"The threat of implosion looks similar to the conditions which prevailed in Greece a few months ago," said David Buik, analyst at BGC Partners.
Greece was saved from imminent default on its loans in May, when it received a euro110 billion ($150 billion) rescue loan from the other 15 eurozone nations and the International Monetary Fund. At the time, eurozone governments sought to save the common currency by creating a euro750 billion backstop for any other countries that might need to tap it. That time seems to be approaching faster than European politicians would have liked.
European Commission President Jose Manuel Barroso said Thursday at a briefing on the sidelines of the G-20 economic summit in Seoul, South Korea, that "in case of need, the EU is ready to support Ireland." He noted there were "necessary instruments" in place for that support.
In the wake of Greece's rescue, heavily indebted countries like Ireland had managed to soothe bond investors' worries by pushing through savage austerity measures — slashing pensions and public sector salaries and services. However, the gradual realization that such cuts will hurt growth for years and even be potentially counter-productive by lowering tax income has kept traders on edge.
Ireland's announcement last week that it would have to cut another euro6 billion next year to meet budget targets underscored its desperate position.
"It seems increasingly likely that Ireland will eventually turn to the EFSF for funding and that it may ultimately have little choice but to restructure its debts," said Ben May, analyst at Capital Economics, referring to the European rescue fund.
Ireland technically has enough cash to last through mid-2011, but the worry is that it will be frozen out of capital markets because of prohibitively high rates when it eventually has to borrow.
Not only are traders worried that Ireland would have to resort to the European bailout fund, but efforts by countries like Germany — effectively the eurozone's paymaster, as its biggest country — to make investors take on a bigger share of the cost of a bailout have further unnerved markets.
As a result, the sell-off in both government debt and stock markets accelerated, threatening to create a downward spiral in which worse market conditions and expectations of a bailout reinforce each other.
Shares in Bank of Ireland were down 9.1 percent at euro0.38 ($0.52) by midday in Dublin and Allied Irish Banks was down 11.5 percent. Both have been bailed out by the Irish government.
Royal Bank of Scotland, which through its unit Ulster Bank is exposed to the Irish market, saw its stock fall 3.9 percent to 40.53 pence (65 cents) in London.