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Portugal's Borrowing Costs Rise

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MADRID — Portugal was forced to offer higher rates to sell new debt Wednesday, underlining concerns among investors about a German-led push to get them to bear some of the cost of any future bailout of countries that share the euro.

The Portuguese sale came after Angela Merkel, the German chancellor, demanded at a European Union summit meeting on Friday that investors “make a contribution” to resolving future European debt crises, rather than leaving taxpayers “on the hook.” Her finance minister, Wolfgang Schäuble, argued in a speech Tuesday night in Paris that the euro’s stability hinged upon making investors responsible.

That prospect has pushed up the spreads this week between the benchmark German bonds and those of suffering euro-zone countries.

In Wednesday’s auction, Portugal sold €500 million, or $702 million, of securities due in February to yield 1.818 percent, compared with 1.595 percent in its previous auction a month ago. Portugal also sold €531 million of bills due in October 2011 at 3.26 percent compared with 2.87 percent last month. Demand for both was also down from the previous month.

Ireland saw its 10-year bonds fall further on Wednesday, setting a new record spread of almost 500 basis points compared with 10-year German government bonds. Ireland’s borrowing costs have increased steadily over the past week amid concerns about its budgetary situation. The Irish government is due to announce this week a number of additional austerity measures as part of its 2011 budget.

The piigs slowly being boiled alive?

A 2 tier Eurozone seems a racing certainty on the current path.

I'm just relieved this economy recovery has everything contained....

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Ireland has been desperately unlucky.

The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue.

Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc.

Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke.

Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish banks.

The uber-strong euro does not help. Under the IMF’s rule of thumb, currencies should fall by 1.1pc to offset every 1pc of GDP in fiscal tightening, ceteris paribus. Given that Ireland is going through the most wrenching fiscal squeeze ever conducted in a modern economy – though Greece is catching up – it needs a devaluation to match. Instead, the euro has risen by 18pc against the dollar since June. (less in trade-weighted terms).

UCD professor Karl Whelan, a former Fed economist, told me this morning that there is a “reasonably high probability” that Ireland will have to turn to the EU-IMF even though this will be resisted until the bitter end as a horrible humiliation.

The Fianna Fail government has one last chance to avoid tutelage. He advises draconian cuts of €7bn when the 2011 budget is unveiled in coming days, rather than the €3bn previously agreed.

“Yields on government bonds have priced in a high likelihood of default. If this continues, Ireland may not be able to continue borrowing on the sovereign bond market,” he said in an article posted on The Irish Economy website, a good source for anybody following this Gaelic tragedy.

And we have the following from AEP

The clock is ticking question is who is going to blow first?

Spanish unemployment is rumbling along.

Viva containment.

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And we have the following from AEP

The clock is ticking question is who is going to blow first?

Spanish unemployment is rumbling along.

Viva containment.

And we had Boy George telling us how Ireland was such a good indicator of how austerity measures would help the economy and placate the Bond Markets.

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Ireland's cost of borrowing hit record levels again today after plans to slash €6bn (£5.2bn) in the upcoming budget – twice that predicted three months ago – were announced by a government struggling to control the country's fiscal crisis.

Finance minister Brian Lenihan conceded the cuts were worse than originally anticipated but that they were "deemed necessary and will underline the strength of our resolve and show the country is serious about tackling our public finance difficulties".

The announcement came as fears that Ireland would seek a Greek-style bailout in the new year grew sharply with borrowing rates on the international markets rose to historic highs.

For the eighth day in a row Ireland's cost of borrowing rose, to hit 7.77%, according to Bloomberg, while Markit reported that the cost of insuring Irish sovereign debt rose was being quoted at 600 basis points, a rise of 200 basis over the past two weeks, to €60,000 per €1m of bonds. This reflected mounting scepticism the country was doing enough to keep Ireland out of the European rescue fund.

"It is really frightening. Just as Lenihan was announcing €6bn cuts, the market was making clear that was not enough," said Limerick university economist Stephen Kinsella. "The very announcement designed to calm people down has freaked them out even further."

They won't keep increasing forever at some point bankruptcy looms.

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