European Union leaders sought on Friday to reassure investors, who have been unnerved by Ireland's fiscal problems, that in the event of a restructuring of any EU state's debt they would not be forced to take a writedown on the value of their bondholdings.
The statement by France, Germany, Italy, Spain and Britain, issued at the Group of 20 summit in Seoul, came after spreads on Irish 10-year government bonds over German bunds surged to a record high, hitting the debt of Portugal and Spain and the euro.
The statement was issued as Irish Prime Minister Brian Cowen told the Irish Independent newspaper that the EU stance "hasn't been helpful" as he sought to battle a financial crisis that threatens his government.
"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 EU is looking at new rules for debt issued from 2013 that may entail private investors rolling over existing debts or to bear their share of losses, as has been the case in new contracts written into debt programmes of some emerging market issuers.
"It hasn't been helpful," Cowen said in an interview with the Irish Independent, referring to German Chancellor Angela Merkel's intervention. "What has been said there has had, I think, an unforeseen consequence, perhaps."
Ireland forced its way onto the G20 agenda as investors fretted it could default as a result of the rising costs of its bank rescue programme that has already driven its budget deficit to 32 percent of gross domestic product.
"I spent a bunch of time, and I'm sure other ministers did, talking about developments in Europe. But that's what you'd expect," a senior U.S. official said, in response to a question about Ireland.
So far, Ireland has not requested financial aid.
Dublin's fiscal woes have been triggered by concerns that it will need to spend more to rescue its stricken banking system in
On Thursday, the cost of insuring Irish debt against default hit a record high and the 10-year Irish bond spread over equivalent German debt — another measure of perceived risk — reached 685 basis points, the highest since the euro was introduced.
A Reuters poll showed that 20 of 30 economists surveyed believed Ireland would need a bailout worth around 48 billion euros before the end of 2011.
MEMORIES OF GREECE
The crisis in Ireland has revived memories of Greece's brush with default earlier this year that required combined European Union and International Monetary Fund intervention costing 110 billion euros ($149.8 billion) and which sparked a selloff in the euro and questions over the single currency's viability.
Since then the euro zone has set up a 440 billion euros sovereign rescue fund backed by another 310 billion euros of International Monetary Fund and European Union funds that could be deployed in countries such as Ireland to stem a run on markets.
Portugal, Spain and Italy are also seen as vulnerable to any troubles in Ireland as investors shun risky euro zone assets.
"The effects of euro zone peripheral bond concerns are spreading through euro zone markets and hitting risk appetite in the process," said Mitul Kotecha, global head of currency strategy with Credit Agricole CIB in Hong Kong.
"The euro is a clear casualty, having dropped further against the U.S. dollar and versus other currencies."
The G20, a body that accounts for 85 percent of global economic output, has been charged with designing a new set to rules to prevent a recurrence of a global crisis, although critics say that it has struggled to reach a meaningful agreement.
The euro fell below $1.36 on Friday for the first time since late September.
