When interest rates soared last week on Irish government bonds, it served as a grim warning to other indebted nations of how difficult and even politically ruinous it could be to roll back decades of public sector largess, the International Herald Tribune reported.
An Irish bond market already in free fall plunged further after Ireland announced on Thursday that it planned to nearly double its package of spending cuts and tax increases to try rein in its huge deficit. Investors took it not as a sign of resolve but rather of Ireland’s desperation and uncertainty about the true extent of its problems.
The yield on Ireland’s 10-year bond climbed to 7.6 percent on Friday, expanding the gap with the 2.5 percent interest rate on comparable bonds issued by Germany, which is emerging most strongly from the European debt crisis.
Borrowing costs in Spain, Portugal and Greece also spiked upward again, as investor concern re-emerged that those countries would be hard-pressed to bring their deficits under control and avoid defaulting on their bonds.
Even as global stock markets rallied last week, those bond market jitters were a forceful reminder of how wary investors remained after Europe’s debt crisis last spring, despite the commitment of a combined 750 billion euros ($1.05 trillion) in bailout funds by the European Union and the International Monetary Fund.
“The scale of the deficits are just so big,” said Philip R. Lane, a professor of international economics at Trinity College in Dublin. “The issues are political as much as they are economic.”
Prime Minister Brian Cowen’s increasingly shaky political standing in Ireland may be threatened by the new deficit reduction measures, which will cut to the heart of the Irish welfare system, including health care.
In Greece, regional elections on Sunday were viewed as a test for the Socialist Party led by Prime Minister George Papandreou, whose government’s austerity measures have been wildly unpopular. In a televised address, Mr. Papandreou claimed victory in the elections and viewed the results as support of his economic policies.
International concerns about the high budget deficit in the United States, and Washington’s seeming willingness to print money rather than tackle tough debt-cutting measures, help partly explain the recent anti-American criticism from countries as diverse as Brazil, China and Germany. Countering those critics may be one of the biggest tasks for President Obama in Seoul, South Korea, this week at the Group of 20 meeting of the leaders of the world’s biggest economies.
Within Europe, though, the more immediate concerns involve Ireland. Its debt woes have stoked fear that it might even need to follow Greece and request a bailout from the European Union and the International Monetary Fund. Such a move could do lasting damage to Ireland’s credit standing.
For the moment, at least, that outcome seems improbable. Unlike Greece earlier this year, Ireland has enough cash on hand to allow it to finance government operations through June 2011. And it has, at least temporarily, withdrawn from the bond market instead of paying the new, higher interest rates, which Irish officials say do not adequately reflect the country’s true economic condition.
To a degree, Irish officials are correct. Market experts concur that the ever widening gap between the interest rates Germany pays on its debt and those of Ireland and other vulnerable euro zone economies is partly a reflection of technical factors, like the tiny number of bonds actually being traded. Low trading volumes mean that every time even a single spooked investor decides to sell an Irish or Greek bond, it can be a market-moving event, causing the price to plummet and the yield to rise.
Still, there is no denying that the recent run-up in interest rates highlights a real concern throughout Europe: that the first round of spending cuts and economic changes put forward by countries that also include France and Britain may not be enough to bring deficits down to the target levels of 3 percent of gross domestic product by 2014. Read more.
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