As Irish 10-year bond yields soared to 9.26% this morning, the highest since the euro was created in 1999, Irish finance minister Brian Lenihan conceded that the republic faced a grave crisis.

"The bond spreads are very serious and there is international concern throughout the eurozone about that," he said in Dublin.

A Reuters poll of economists and bond strategists also ratcheted up the pressure on Dublin, showing that 20 out of 30 respondents thought it was unlikely that the country would make it through the end of 2011 without external assistance.

Speaking in Seoul where he is attending the G20 summit, Barroso earlier said that Ireland would be supported by its fellow eurozone members if its debt crisis escalated. But his words failed to calm the European bond market, with the cost of insuring Irish, Spanish and Portuguese government debt against default hitting all-time highs.

Irish 10-year bond yields soared, along with the premium charged to hold 10-year Irish bonds over German bunds. This European benchmark rose to a record 680 basis points, with traders saying liquidity had dried up. In Portugal, which is also struggling to cope with debt, the spread rose above 500 points for the first time.

"It's the same trend we've been seeing. The market is very nervy," said Markit analyst Gavan Nolan.

Ireland's crisis has triggered fears of a repeat of Greece's near-bankruptcy, casting a shadow over the summit as world leaders try to hammer out a deal for global growth.

"What is important to know is that we have all the necessary instruments in place now to support Ireland if necessary," Barroso said, when asked whether the EU would bail out Ireland as it did Greece earlier this year. "In case of need, the EU is ready to support Ireland."

"We are monitoring the situation closely," he continued, adding that "we support the efforts of the Irish authorities" to tackle a deficit that has ballooned after bailouts of cash-strapped Irish banks.

Ireland's finance minister, Brian Lenihan, welcomed Barroso's comments today, saying they showed the solidarity between European nations.

"What is important to know is that we have all the essential instruments in place in the European Union and eurozone to act if necessary," Lenihan said.

Analysts see bailout ahead

As rumours of an imminent bailout swirled, the International Monetary Fund was forced last night to deny that Ireland had requested financial assistance. The IMF said relations with Ireland were "normal", and that Dublin's plans to slash its deficit by €15bn (£12.8bn) by 2014 showed it was committed to fiscal adjustment.

Analysts, though, believe that Ireland will eventually need international aid.

"The most likely outcome now is that Ireland will need to receive assistance from the EU/IMF. Should this be the case we estimate a funding requirement of approximately €43bn over the next two years, to cover redemptions and fund the fiscal deficit," said Gary Jenkins, head of fixed income research at Evolution Securities.

The EU already provides long-running guarantees on certain liabilities held by Ireland's crisis-hit banks.

Irish bond yields yesterday posted their biggest one-day jump since the launch of the euro on fears that the government would be forced to seek international aid. Irish 10-year bond yields hit 8.76%, despite assurances by Ireland's prime minister that the country would not be forced to access a European bailout fund.

In May, European governments agreed a €110bn bailout package for Greece.

However, Ireland's government still insists it can reduce its debt mountain. It is due to unveil a four-year programme of austerity budgets later this month.

Julia Kollewe

Source >  Guardian