Germany denies private bailout plan fuelling Ireland fears

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Germany hit back Friday at market jitters over the debt woes of embattled eurozone member Ireland, insisting that investors were guilty of a "total misunderstanding", as EU members rallied round.

Plans to force bondholders to bear part of the costs of bailing out near-bankrupt European countries will not affect Ireland and are not worsening its crisis on the bond markets, Germany's finance minister said.

Linking the two issues is a "total misunderstanding", Wolfgang Schaeuble said at a G20 summit in Seoul, where European finance ministers have discussed Ireland's problems as its debt repayment costs soar.

Germany is backing a plan to force private investors to bear a share of bailout costs for countries facing fiscal ruin, but Schaeuble said this would not take effect until 2013 and could not be pushing up interest yields on Irish government bonds today.

"We (European finance ministers) talked about this again," he said.

The finance ministers of Britain, France, Italy and Spain were also attending the G20 summit, and the three countries were expected to issue a declaration on Ireland.

"It has to do with decisions from the European Council (EU leaders), and it's a total mis-assessment of the issues at hand.... It has absolutely nothing to do with any current discussion, and you can't get them mixed up."

Ireland's cost of borrowing hit record highs on Thursday, with 10-year government bond yields jumping to 8.929 percent, the highest level since the euro was created in 1999, placing Europe's bond markets under serious strain.

The leap fuelled fears that the eurozone debt and deficit crisis could be entering a dangerous second phase just six months after a massive bailout of Greece, to which Germany was the biggest contributor.

Portuguese bond yields also hit historic peaks on Thursday.

German Chancellor Angela Merkel said Thursday that European taxpayers should not pay the whole price of rescuing debt-laden countries.

"Let me put it simply -- there may be a contradiction between the interests of the financial world and those of the political world," she said at a G20 business summit in Seoul.

"We cannot explain to our voters and citizens why taxpayers must finance certain risks, and not those who made a great deal of money taking those risks."

Under Merkel's proposals, future rescue packages would only be launched if government bondholders agree to bear some losses.

EU leaders agreed last month to design a permanent plan of aid and penalties for eurozone countries facing fiscal ruin, to take over after the lifespan of a current crisis response fund ends in 2013.

European Commission president Jose Manuel Barroso insisted Thursday that the European Union was prepared to stand by Ireland.

"What is important to know is that we have all the necessary instruments in place now to support Ireland if necessary," said Barroso.

Irish bond yields -- the rate of return paid to investors holding the government debt instruments -- have soared in the face of mounting investor unease at the country's stretched public finances.

Later this month, Finance Minister Brian Lenihan will unveil a four-year programme of austerity measures that will involve a 15-billion-euro correction to rein in the huge public deficit, ahead of the annual budget in December.

-- Dow Jones Newswires contributed to this story --

© 2010 AFP

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