THE PREMIUM demanded by investors for holding Irish Government debt fell slightly yesterday as the European Commission strongly backed Wednesday’s Budget.

The Irish people and authorities should be commended for the “considerable” steps they are taking to tackle the collapse in the public finances, said monetary affairs commissioner Joaquin Almunia. But he stressed that further efforts would be needed to correct the soaring budget deficit in the years after 2010.

The “spread” or interest rate premium demanded by investors for holding Irish Government bonds compared with similar German bonds fell from 1.82 per cent to 1.78 per cent. The decline came amid continued concern over the fiscal deficit of fellow euro zone member Greece, which has pushed up the premium demanded for holding the bonds of other peripheral euro zone members this week. The spread on Greek bonds to the German bund was 2.27 per cent yesterday.

Ireland’s Government has continued on an “aggressive” path to cut its deficit, said Brian Coulton, head of EMEA sovereign ratings at Fitch Ratings. The Budget was “more or less in line” with what the company had anticipated, he said.

Ireland’s AA1 rating and negative outlook “remain appropriate”, Moody’s analyst Dietmar Hornung said today. “The measures the Irish Government are taking are impressive, but the scale of the challenge is considerable,” the Frankfurt-based analyst said. “Ireland is showing more flexibility than other countries in dealing with its problems.”

The endorsement of the package from Mr Almunia, who recently extended by one year the Government’s deadline to bring the deficit within EU limits, stands in contrast to his warning to the Greek authorities three days ago to put their house in order.

“In sticking to the consolidation target for 2010 that was announced in the April supplementary budget, the Irish Government is clearly demonstrating its continued commitment to implementing a sustainable and credible fiscal consolidation strategy in these challenging times,’’ Mr Almunia said.

“The planned consolidation measures of around €4 billion (2.5 per cent of GDP) make this the fifth substantial consolidation package the Irish authorities have adopted since July 2008.

“While more remains to be done in the coming years, the budget is an important step towards first stabilising and then gradually reducing the Irish general government deficit to 3 per cent of GDP by the 2014 deadline set by the commission and endorsed by the council under the excessive deficit procedure.’’

Arriving at the EU summit last night in Brussels, Taoiseach Brian Cowen indicated little concern about the fact that an escalation of market and political pressure on the Greek government over its deficit had pushed Irish bond spreads wider.

“What we have been seeking to do, what we passed in the Dáil last night in terms of financial resolutions, what we’ll be doing in the Dáil this week and next week, show clearly what our position is, what our fiscal strategy is what our budgetary approach,” he said.

Mr Cowen, speaking before Mr Almunia, made public his support for the Budget and said the measures were well received.

“One of the purposes of the Budget was a determination by the Government to show – by the Irish people, indeed – to manage our own affairs and to do whatever is necessary to show that we would stabilise the deficit.”