Eurozone fires defy rescues and budgets, fed by bond storm

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The eurozone crisis resisted firefighting on Thursday, with markets fanning flames over German demands for bondholders to pay for national bailouts, Spain on the rescue slope and Ireland still facing battles over its budget.

The interest rate Ireland must pay to borrow jumped above 9.0 percent to 9.01 percent, in defiance of extra rescue-driven austerity measures announced by the Irish government on Wednesday.

High and rising bond yields signal rising reluctance of people managing international savings to lend to a struggling government, and were milestones on the roads taken by Greece and Ireland towards the lifeboat.

The borrowing costs for Spain rose again to 5.190 percent from 5.064 percent late on Wednesday, in defiance of government assurances that the country will not need a rescue.

Spanish Banking Association president Miguel Martin, speaking to the press after a banking meeting, said: "Of course Spain will escape any rescue. We don't even begin to think that Spain may need a rescue."

In Portugal, where the government says its debt is under constant market attack, the bond yield rose to 7.020 percent from 7.016 percent.

Markets are showing that they are still deeply uncertain about details of the Irish rescue and also about pitfalls for the tottering government on the route to a budget vote on December 7.

Financial analysts said the focus was on reports that Germany was pressing even harder for bondholders to be hit directly when countries are rescued.

Chancellor Angela Merkel and President Nicolas Sarkozy were due to hold talks by phone later on Thursday, with the German business daily Handelsblatt reporting that the German proposal was running into opposition in Europe, including from France.

French Foreign Minister Michele Alliot-Marie and German counterpart Guido Westerelle said after talks in Berlin that the two countries were working on a new crisis mechanism that would defend the euro against speculators.

"We are confronted today by an attack by speculators on Europe and on the euro, with countries that could appear fragile the first in speculators' sights," Alliot-Marie told reporters.

"At the moment we are in discussions. The mechanism has not yet been fixed but this is one of the elements that is on the table and which we are working on.

"Very rapidly there is going to be a system that will be a system allowing us to respond comprehensively and durably in order to ensure that the euro has a solid future."

Top French and German officials are due to meet in Freiburg, Germany, on December 10, six days before an EU summit when German demands for big changes in how the EU and eurozone are run are expected to be a hot issue.

The German demands, and essentially uncertainty when any changes might take effect, blew the fuse of the latest crisis which now puts Ireland in limbo over a rescue and increasingly puts Portugal and Spain at risk.

The proposal, which emerged a month ago, would change fundamentally the basis on which people have accepted the risk of funding governments, implying that investors would not get all their money back at the end of the loan.

Some analysts say that such a measure is reasonable but that Merkel chose a bad moment and had not made clear that her proposal would apply when a current bailout scheme, set up when Greece was rescued, runs out in 2013.

The latest reports suggest that in fact the rules of the game could change next year.

At ING bank, analysts commented that tension had again risen on European credit default swaps, which are instruments offering insurance against a country becoming insolvent.

ING said the effects were being felt also on the market for bank debt.

The newspaper report that Merkel's call for "a liability clause for European bonds as of next year, two years in advance of the proposed permanent crisis resolution mechanism, was only adding fuel to the fire," ING said.

The Irish government now faces battles on all fronts, to tie up the rescue with the European Union and IMF, to survive demands for an early confidence vote and to get its new debt-fighting budget through parliament in two weeks' time.

Analysts warn that any setbacks on this rocky path could upset payment of rescue money and alarm markets, as signalled by the latest surge in its bond yield.

© 2010 AFP

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