G20 statement on Irish debt helps to calm fears

Image caption,
Economists say the Irish situation is still "painful", despite the reassurance

European leaders at the G20 have eased investors' fears that they will have to bear heavy losses if the Irish Republic defaults on its debts.

Finance ministers stressed that new bail-out rules, under which investors would have to share more of the pain, would only apply after 2013.

That led to a fall in the yield on Irish bonds - reflecting the perceived reduced risk of owning Irish debt.

But economists warned that the Irish situation was still very serious.

"The underlying problem has not gone away," said BNP Paribas' Ken Wattret.

"The Irish government's deficit position is a major problem, their debt position is deteriorating very, very quickly and... its austerity programme may well push the economy into another round of recession," he said.

"And it may not be possible to get to the bottom of this problem without some assistance from the EU."

Default risk

Irish bond yields fell steadily throughout the day towards 8%, from Thursday's all-time high of almost 9%.

As with the interest rates on consumer loans, the higher the rate demanded by the lender (in this case investors), the higher they believe the risk to be of the debt not being paid back.

Bond yields had continued to rise to record levels all week, as the perception grew amongst investors that governments were less likely to step in to prevent the Republic defaulting on its debts if it got into difficulty.

Germany in particular was seen to be pushing for much more burden-sharing, so that unlike in the Greek debt crisis, governments would not have to bear the bulk of losses.

But on the sidelines of the main G20 summit in Seoul, the finance ministers of Germany, France, Italy, Spain and the UK stressed that a proposed new bail-out mechanism did not apply to any outstanding debt.

"Any new mechanism would only come into effect after mid-2013, with no impact whatsoever on the current arrangements," they said in a joint statement.

'Full confidence'

Irish Finance Minister Brian Lenihan welcomed the statement.

"Our EU partners have confirmed their full confidence in the budgetary strategy being pursued by the government," Mr Lenihan said.

He stressed that his country did not intend to return to the bond markets to raise money until early next year.

The Republic had not asked for any help from the European Union and the IMF, he added.

However, one Dublin-based economist said that the country may still be forced to seek assistance.

"The reality is that the pressures we're seeing on Irish bond yields, the pressures we're seeing on Portuguese and to some extent on Spanish and Italian yields as well, is telling us that it's beyond Ireland," said Austin Hughes, chief economist at KBC Ireland.

"In that sense, some bail-out may have to be agreed, not because Ireland is in particular difficulties, but because it's a symptom of a much broader problem in the eurozone," he told BBC World Business News.

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