BRUSSELS (AP) — Europe’s debt crisis hit a critical juncture Tuesday, as finance ministers tried to keep Ireland’s market turmoil from triggering a domino effect that could topple other vulnerable nations like Portugal and rock the region’s currency union and shaky economic recovery.
Only months after saving Greece from bankruptcy in May, the 16-country eurozone has been shaken anew by concerns that Ireland will be unable to sustain the cost of its banks’ failure, suggesting only another bailout can now soothe investors’ jangled nerves.
Crucially, European nations are worried that the tension is making borrowing more expensive for countries like Portugal and Spain, threatening to push them to the brink of default, as happened with Greece. Containing contagion — a market panic that jumps from one weak country to the next — is the priority.
Behind Ireland stands Portugal, one of the eurozone’s smaller member with 1.8 percent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big — 11.7 percent of eurozone output — that it could present a much larger challenge if it needs help.
“We must all work together in order to survive with the eurozone, because if we do not survive with the eurozone, we will not survive with the European Union,” said EU President Herman Van Rompuy.
Rates on Irish bonds rose again Tuesday as investors’ expectations ebbed for an early decision on an Irish bailout — which would be expected to guarantee they will get paid back on their holdings. The yield on 10-year Irish treasuries rose to 8.16 percent from Monday’s closing yield of 7.94 percent.
Ireland’s minister for European affairs, Dick Roche, concedes that Irish banks are having trouble drumming up operating cash, but insists no bailout agreement is in store.
He suggested that others in the EU were panicking over how to manage Ireland’s €45 billion ($61 billion) bank-bailout bill and its deficit, which is forecast to reach a staggering 32 percent of GDP this year, a record for post-war Europe.
“I would hope that after the meeting this afternoon and tomorrow there would be more logic introduced to this. There’s no reason why we should trigger an IMF or an EU-type bailout,” Roche said. “There is a problem with liquidity in banks, but I don’t think the appropriate response to that would be for European finance ministers to panic.”
Analysts suggested that Ireland should cut a deal now with EU colleagues and not wait until next year, when the country could rapidly reach the edge of bankruptcy. Ireland says it has sufficient cash to fund government services through June 2011, and has postponed returning to the bond market until early 2011 in hopes that the interest rate demanded by investors will have fallen by then.
Ireland has already nationalized three banks — Anglo Irish, Irish Nationwide and the Educational Building Society — and has taken major stakes in Allied Irish Banks and Bank of Ireland. Allied Irish is expected to fall under majority state control within weeks.
David McWilliams, a former Irish Central Bank economist and prominent commentator, said Ireland’s only card worth playing in this week’s Brussels meetings was to admit defeat and stress that Ireland’s problems were Europe’s responsibility, thanks to the euro currency.
McWilliams said Ireland should agree to let the European Central Bank — which has full-time observers inside the Department of Finance in Dublin — take “direct responsibility for the Irish banks, over and above the Irish government.”
That would keep the Irish banks from contaminating the bond market, easing the market turmoil for everyone.
“We need finally to be honest and say to our European colleagues that our banks are bust,” he said. “No matter how much we bluff, that problem’s not going to go away — and our problem is your problem. You have got to help us, because your problem could transfer from Ireland, Portugal and Greece to Spain and Italy. Although it’s not pleasant, we’ve got to defend ourselves. We’ve got to say we’re in this euro together, so what are you going to do for us?”
The rise in yields across highly-indebted European nations has pushed the EU back into the depths of crisis management, after policymakers had spent their recent gatherings focusing on crisis prevention.
“This is a time for cool heads,” Amadeu Altafaj Tardio, a spokesman for the EU’s Monetary Affairs Commissioner Olli Rehn, said of the finance ministers meeting. “This is a time for political determination and this is a time for serious implementation of decisions that have been taken.”
In an interview with French newspaper Le Figaro published Tuesday, Greek Prime Minister George Papandreou insisted his country won’t default on its €298 billion in debt because doing so would be a “catastrophe” for Greece, Europe and the euro.
On Monday, Greece said this year’s deficit would likely reach 9.4 percent, well above the 8.1 percent level it forecast earlier this year when it received a €110 billion bailout from European partners and the International Monetary Fund.
Portugal, which is struggling with high budget deficits, also saw itself forced to deny rumors that it would seek financial assistance.
“Portugal has made no official or informal contacts with a view to seeking European aid,” Finance Minister Fernando Teixeira dos Santos said in an interview Monday with financial newspaper Jornal de Negocios. But he added that “if Ireland’s situation deteriorates” the market pressure on Portugal would increase.
