'No talk' of EU help for Ireland

image captionThe Irish Republic faced one of the deepest recessions in the eurozone

The European Union has not discussed with Ireland any need for financial help, the EU's economic and monetary affairs commissioner has said.

Olli Rehn is in Dublin for two days to review the Irish Republic's draconian draft 2011 budget.

Financial markets increasingly fear the government will default on its debts, with Irish bond yields at new highs.

But Mr Rehn said confidence would be restored once the country published a four-year plan to cut debts.

His visit is being seen as an effort to convince markets that Ireland does not need a Greece-style bailout.

"Ireland has not requested the activation of any European financial backstops, we have not discussed this matter," Mr Rehn said.

Bad debts

The Irish parliament, the Dail, will vote in December on the budget.

However, concerns are mounting that it may not pass the budget.

In a joint press conference with Irish Finance Minister Brian Lenihan, Mr Rehn urged all parties to support planned cuts.

The country has promised the EU it will bring its underlying deficit down from 12% of economic output to 3% by 2014.

The Irish Republic's current deficit is an unprecedented 32% of gross domestic product, if the one-off cost of bad debts in the state-guaranteed Irish banking system is included.

The draft budget will include a record 6bn euros (£5.2bn, $8.4bn) of spending cuts, and aims to bring the deficit down to between 9.5-9.75% next year.

Full details of the budget - which needs the EU's endorsement - will be published on 7 December.

Unreasonable delay

The opposition Fine Gael party, while agreeing that the budget needs to be brought under control, has said it does not plan to support the budget because it has no confidence in the government.

The government has delayed four by-elections to the parliament, which have the potential to deprive it of its majority of just three seats.

After a ruling by the Republic's second-highest court, the government has agreed to hold the longest-delayed by-election on 25 November.

The Donegal South seat has remained vacant for 17 months, which in the court's opinion is an unreasonable delay.

However, the government said it would not hold the other three elections until the Irish supreme court had heard its appeal against the lower court's ruling.

Buyers' strike

Whether or not the budget passes, markets are increasingly concerned that Dublin will find its debt trap impossible to escape from.

Investors fear that the budget cuts are likely to worsen the country's already deep recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

And there is concern that there may be more big write-downs of bad debts to come from the Irish banking system.

Writing in the Irish Times, economist Morgan Kelly of University College, Dublin, warned that losses at the other state-guaranteed banks could more than equal the approximately 30bn euros that the Irish government has already suffered at Anglo Irish Bank.

The annual yield on the Irish Republic's benchmark 10-year bond hit a record high of 7.84% on Monday, as investors demanded a higher return to compensate them for the risk of a debt default.

The difference in yield between the Irish bond and its German counterpart - which measures their relative riskiness - also hit a new high of 5.56%.

Some investors warned that the Irish government may face a "buyers' strike" by bond investors when it next needs to borrow from the market by the middle of next year.

If so, the Irish Republic may have to turn to the EU's new sovereign bail-out fund.

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