WRAPUP 5-Respite for Ireland, euro after sharp selloff

By Lorraine Turner and Padraic Halpin DUBLIN, Nov 12 (Reuters) - Market pressure on Ireland and other euro zone states eased and the single currency made up ground on Friday after Europe reassured bondholders they would not be forced to take a hit in the event of a new bailout in the bloc. Investor jitters about the 16-nation euro area persisted, however, with European officials forced to deny for a third straight day that Ireland was preparing to tap an EU rescue fund set up earlier this year after Greece's debt meltdown. Spreads between 10-year Irish bond yields and German benchmarks fell nearly 100 basis points, ending a fierce two-week bout of peripheral debt selling which has raised concerns about the stability of the currency zone and hammered the euro. Pressure on Greece, Portugal and Spain also eased after a statement by France, Germany, Italy, Spain and Britain at a Group of 20 summit in Seoul confirmed holders of existing debt would not have 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. Irish Prime Minister Brian Cowen criticised Germany for pushing the idea of asset value reductions, or "haircuts", for private bondholders in a future rescue mechanism that Berlin wants in place by 2013, when the currency bloc's temporary bailout facility expires. Although Germany has made clear the new mechanism would only apply to debt issued after that date, the plan has spooked investors, who have sent the borrowing costs of peripheral euro countries to record highs. "It hasn't been helpful," Cowen told the Irish Independent newspaper, referring to Germany's plan. "The consequence that the market has taken from it is to question the commitment to the repayment of debt." Concerns about Ireland and fears its woes could drag down other countries on the euro zone periphery like Portugal and Spain have weighed on the euro, which hit its lowest level against the dollar since late September on Friday. But the EU statement appeared to calm currency and bond traders, who pushed the euro up a full cent from six-week lows to $1.37 and the risk premiums for Irish and other peripheral debt lower. Ten-year Irish spreads over German Bunds stood at 600 basis points, down from record highs of nearly 700 earlier in the session, while Greek spreads narrowed to 900 basis points after rising to 985 earlier. Despite Friday's gains, peripheral yields remain far above the levels they have traded at in recent months and traders said worries about the financial state of Ireland and Portugal remained acute. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphics: Bank exposure to Irish debt http://r.reuters.com/fez84q Euro zone struggles with debt http://r.reuters.com/hyb65p Ireland's bailout challenge http://r.reuters.com/wuv48p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> NO MENTION OF HAIRCUT Gilles Moec, an economist at Deutsche Bank, said the fact that the EU statement did not include any mention of "haircuts" was a positive for the markets. "I think that it is very significant that the possibility of haircuts is not mentioned," Moec said. "I think that's a clear signal they want to send to the market." Germany is expected to finalise its proposals for the new rescue mechanism next week, possibly presenting them to its euro zone partners at a meeting in Brussels on Tuesday, Nov. 16. Finance Minister Wolfgang Schaeuble could come under intense pressure at that meeting to water down the plans, which Ireland and others blame for rekindling a crisis euro zone countries thought as recently as last month they had largely overcome. The Irish Times reported on Friday that informal contacts were already under way between Brussels, Berlin and other capitals to assess their readiness to activate the EU's rescue fund in the event of an application from Dublin. A spokesman for Ireland's finance ministry called the report "completely untrue". Irish officials have insisted they have no intention of tapping the fund, stressing they are not in the same situation as Greece was back in May, when it was forced to seek a 110 billion euro ($150 billion) rescue from the EU and IMF. Ireland is fully funded through mid-2011 and is therefore not currently at risk of a Greek-style liquidity crisis. Dublin expects to return to the market early next year and hopes a four-year 15 billion euro austerity plan to be unveiled later this month and passage of the 2011 budget in early December will bring its borrowing costs down. "We're not borrowing at the present time so I don't think any of what's going on at the moment is going to affect the real price of Irish borrowing," Communications Minister Eamon Ryan said on Friday. "When we do have to go out next year, I think there will be different circumstances." But concerns remain about whether Irish borrowing costs will fall far enough by then to make debt refinancing sustainable, or whether the deeply unpopular Cowen can win passage of the budget on Dec. 7 given his government's razor-thin majority in parliament. Growth data on Friday highlighted sharp divergences between euro zone heavyweight Germany and the weaker periphery, which is putting in place draconian austerity measures that are likely to depress their economies further. (Additional reporting by Patricia Zengerle in SEOUL, Carmel Crimmins and Jodie Ginsberg in Dublin, Jan Strupczewski in Brussels ; Writing by Noah Barkin; Editing by John Stonestreet) ($1=.7332 Euro) Keywords: G20/IRELAND COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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