EU leaders reassured investors they would not be forced to writedown the value of their bond holdings in the event of a new euro zone bailout, easing pressure on Irish debt that has sparked fresh fears of contagion.
The spreads between Irish bond yields and German benchmark issues – a key gauge of faith in Irish finances – fell to 635 basis points after spiking to record highs near 700 earlier amid concern the former "Celtic Tiger" may need a Greek-style rescue.
Pressure on other peripheral euro zone countries like Greece and Portugal also eased after a statement by France, Germany, Italy, Spain and Britain issued at the Group of 20 summit in Seoul confirmed that holders of existing debt would not be asked to shoulder the costs of any near-term rescue.
"Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any programme under current instruments," the statement said.
The statement came as Irish Prime Minister Brian Cowen hit back at Germany for pushing the idea of so-called "haircuts" for private bondholders in a future rescue mechanism for the single currency zone that would probably not go into force before 2013.
Although Germany has made clear the new mechanism would not apply to existing debt, the plan has spooked investors, who have sent the borrowing costs of peripheral euro countries to record highs, sparking concern about the future of the currency bloc.
"It hasn't been helpful," Cowen told the Irish Independent newspaper, referring to Germany's drive to put in place a new mechanism. "The consequence that the market has taken from it is to question the commitment to the repayment of debt."
City A.M. Reporter