Borrowing costs rise for Ireland, Greece and Portugal

MARKETS DELIVERED a cold response to an agreement by EU finance ministers to set up a permanent bailout fund as Irish, Greek and Portuguese borrowing costs rose and investors fretted about a threatened rate rise.

Ten-year Portuguese bond yields jumped 0.13 percentage points to 7.49 per cent as its Socialist-led minority government struggled to avert collapse. Euro zone sources have expressed concern that any caretaker administration might not have legal powers to seek emergency financial aid if, as is widely expected, the country cannot avert the threat of an EU-IMF bailout.

Hawkish comments by European Central Bank (ECB) executive board member Jürgen Stark suggested that the nuclear and tsunami emergencies in Japan will not sway the bank from a likely rate increase next month.

“For me, the situation in the euro area, with the ongoing economic growth and ongoing threat to price stability, in the short term has not changed,” he told Japanese paper Nikkei.

Two days before EU leaders travel to a Brussels summit to sign off on a “comprehensive response” to the debt crisis, agreement on an increase to the lending capacity of the existing bailout fund remains stalled by Finland.

While the temporary European Financial Stability Facility (EFSF) can lend up to €250 billion, euro zone leaders want the zone’s triple-A countries to increase their guarantees to increase its lending capacity to €440 billion.

As Finland’s liberal-led government fights an election next month in which it has come under pressure from a populist Euro-sceptic party, some sources fear there may be no deal on EFSF lending capacity until the summer.

However, with Europe’s routine political business overshadowed for more than a year by the debt debacle, EU leaders are still hoping that a two-day summit starting tomorrow will enable them to pull out of crisis mode.

There are three core elements to their response: stricter governance rules; a new competitiveness pact; and a reinforced bailout scheme. Although the ECB says key strands of the plan do not go far enough, European Commission chief José Manuel Barroso said the scope of the package should not be underestimated.

“These changes were unthinkable two years ago,” he told reporters in Brussels. “Member states would never have accepted this kind of language or of mechanisms. They would be opposing it very strongly.”

With the ministerial deal on the permanent European Stability Mechanism (ESM) opening the door to debt restructuring in the euro zone, the weakest single currency countries saw their borrowing costs spike again.

The yield on Irish two-year bonds was up 0.62 percentage points to 9.87 per cent in late afternoon trading after rising as high as 10.18 per cent. The pressure came as Taoiseach Enda Kenny prepared to press again at the summit for lower interest on Ireland’s bailout loans.

The debt of Greece, the other euro zone bailout recipient, was also under pressure. The yield on its two-year paper advanced 0.47 percentage points to 14.91 per cent.

Mr Barroso acknowledged he would have preferred the overhaul of the bailout schemes to have gone further but said it was not possible to achieve political consensus. “The commission would be in favour of increased flexibility of the EFSF and for the ESM but it was not possible to come to [a] more ambitious agreement,” he said. “I think it’s very important to accept that the ESM may intervene in the primary market but some of our other proposals did not meet consensus among the members so I don’t think now it’s useful to insist on that because we gain nothing by insisting on that.”