THE INTEREST rate demanded by those who lend to the Government rose to new highs yesterday on fears over the State’s budgetary position.
Speculation intensified in financial markets that the Government would eventually have to turn to the EU and the International Monetary Fund (IMF) for a bailout.
Minister for Finance Brian Lenihan insisted the Government was not facing difficulty raising funds. His assertion will be tested as early as Tuesday, when the Government auctions at least €1 billion of new debt.
The rate of interest, or yield, on the most closely watched Irish Government bond, which is repayable in 10 years, rose by almost one third of a percentage point.
This rise, which is among the largest registered on a single day, brought the yield to 6.3 per cent by the close of trading. A rising yield indicates investors consider the prospect more risky.
The new peak is almost half a percentage point above the level reached at the height of Europe’s government debt crisis in early May. It also exceeds the previous peak for the past decade, reached in the aftermath of Anglo Irish Bank’s nationalisation in January 2009.
The Department of Finance and the IMF both sought to calm markets yesterday, rejecting speculation that Ireland would have no choice but to seek a Greek-style bailout.
The spike in yields followed a report by British investment bank Barclays Capital warning Ireland “may need to seek outside help” from the EU and the IMF if there are additional financial-sector losses, or the economy worsens.
Barclays also advocated making the bondholders in Anglo Irish Bank share losses under these circumstances.
The Department of Finance was dismissive. “There is absolutely no truth to a rumour concerning external assistance,” said a spokesman.
An IMF spokeswoman said Ireland had taken “assertive measures” to deal with the problem, adding: “With the most recent policy measures, the authorities continue their support of the banking system and help maintain financial stability.”
A combination of large underlying budget deficits, bank bailouts and weak economic growth have, since early 2009, placed Ireland among the euro area countries facing the worst problems in funding deficits.
The situation has become markedly more fragile recently because of the escalating costs of supporting the banking system.
Green Party leader John Gormley warned that renegotiating with Anglo Irish Bank bondholders could push up bond yields.
However, Fine Gael said it and the Labour Party were in agreement that the Government should negotiate with Anglo’s bondholders on a “fair and equitable” arrangement.