A RENEWED wave of volatility swept through European markets as the €85 billion EU-IMF bailout of Ireland failed to dampen anxiety that Portugal and Spain may need external aid.
As the euro fell to its lowest level for two months against the dollar, pressure on heavily indebted counties such as Italy and Belgium was seen as evidence that the Irish rescue has failed to avert contagion in the euro zone.
EU leaders had hoped markets would take comfort from the completion of the Irish rescue deal and their steps to clarify how private investors would shoulder a burden in any sovereign rescues after 2013.
However, Spanish borrowing costs rose to their highest level since the euro was introduced and the cost of insuring against any default on Portuguese debt rose to a record. Madrid and Lisbon have strenuously denied that they are in need of any external aid but investors continue to question whether they will be able to finance themselves on the market.
The interest rate on Irish 10-year bonds rose to 9.47 per cent.
The turmoil came as EU Commission sources said the Government’s growth forecasts in the National Recovery Plan published last week were unrealistic, given pressure on the economy as a result of stringent austerity measures.
Economics commissioner Olli Rehn downgraded his Irish growth forecasts, saying the economy would expand by 0.9 per cent next year and by 1.9 per cent in 2012.
This contrasts with the Government’s 1.75 per cent growth forecast for 2011 in the four-year plan and a 3.25 per cent forecast for 2012.
A senior commission source said its negotiating partners in the bailout “troika” — the European Central Bank and the IMF — each shared the view that the forecasts in the four-year plan were too optimistic.
“After very intense discussions it turned out that certainly from the troika point of view that certainly these forecasts were on the high side,” the source said.
“Given the strong fiscal consolidation to be undertaken in Ireland next year and following that, according to that view, the growth would be significantly lower than expected by the Irish Government.”
This assessment led to a one-year extension until 2015 to the deadline to achieve a 3 per cent budget deficit when the bailout was agreed on Sunday.
Separately yesterday, Labour Party spokesman on justice Pat Rabbitte said the Government may be acting in breach of Article 29 of the Constitution by proceeding with the bailout programme for Ireland announced on Sunday.
Taoiseach Brian Cowen and Minister for Finance Brian Lenihan had made it clear they would not submit the bailout to a Dáil vote, he said.
However, Article 29.5.2 of the Constitution said “The State shall not be bound by any international agreement involving a charge upon public funds unless the terms of the agreement shall have been approved by Dáil Éireann”.
Asked if he would consider taking court action to vindicate Bunreacht na hÉireann as he saw it, Mr Rabbitte said he would “not rule out anything” but first wanted to examine the Government’s response.
Minister of State for Children Barry Andrews said the EU-IMF programme was not an international agreement for the purposes set out in the Constitution and neither the Oireachtas nor a future government was restricted by the agreement.
A Government source said yesterday a draft of its memorandum of understanding with the EU and IMF may be published later this week to give the public and the Opposition sight of the conditions attached to the €85 billion rescue package ahead of the budget.
The memorandum, which will give legal status to the bailout, cannot be formally adopted until it is approved by the IMF board in Washington. It is understood the earliest that this can be done is Friday, December 10th, three days after the budget.
