By Jan Strupczewski BRUSSELS, Nov 12 (Reuters) - Ireland is in talks to receive emergency funding from the EU and it is likely the former "Celtic Tiger" will become the second euro zone country after Greece to require a rescue, sources said on Friday. Irish borrowing costs have shot to record highs this week on concerns about the country's ability to get a deficit swollen by bank bailouts under control, as well as worries private bond holders could be forced to shoulder part of the costs of any bailout by taking "haircuts" on their holdings. Government officials in Dublin have denied repeatedly in recent days that they plan to tap EU funds and a finance ministry spokesman said after the Reuters story was published that Ireland had made no application for aid. Euro zone sources told Reuters that aid discussions were under way, however, with one official saying it was "very likely" Ireland would get financial assistance from the EU facility set up after Greece was forced to seek aid in May. "Talks are ongoing and European Financial Stability Facility (EFSF) money will be used, there will be no haircuts or restructuring or anything of the kind," one euro zone source said. A second source confirmed the talks. The spreads between Irish 10-year bond yields and German benchmarks have rocketed to highs of nearly 700 basis points over the past two weeks on fears of "haircuts" but they narrowed to around 580 basis points after the Reuters story. The euro, which has also suffered from currency bloc jitters, came off its highs of the day to trade around $1.37. Pressure on Irish and other peripheral euro zone debt had eased slightly earlier in the day after France, Germany, Italy, Spain and Britain issued a statement at a Group of 20 summit in Seoul that confirmed holders of existing euro debt would not take a hit. But borrowing costs remain sky high and the pressure on Ireland's fragile banks may have forced the government to enter aid talks even though it is fully funded until mid-2011 and does not face the same liquidity crisis that confronted Greece earlier in the year. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 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 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> HUMILIATING SETBACK Going to the EU for aid would represent a humiliating setback for a country that posted some of the best growth rates in the 16-nation euro zone in the bloc's first decade of existence. The global financial crisis, weak regulation of the banking sector and a property bubble fuelled by rock-bottom interest rates eventually caught up to Ireland. This year its deficit is projected to total 32 percent of gross domestic product (GDP), easily the highest in Europe. Jean-Claude Juncker, the chairman of the Eurogroup forum of euro zone finance minister, said the EU was following the situation in Ireland very closely but that it was up to Ireland to decide whether to seek support. He said there was no immediate reason to think Ireland would ask for aid. Earlier on Friday, Irish Prime Minister Brian Cowen blamed Germany for aggravating Ireland's woes by pushing the idea of asset value reductions for private bondholders in a future rescue mechanism that Berlin wants in place by 2013, when the EFSF facility expires. Although Germany has made clear the new mechanism would only apply to debt issued after that date, the plan spooked investors. "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." Germany is expected to finalise its proposals for the new rescue mechanism next week, possibly discussing them with its euro zone partners at a meeting in Brussels on Tuesday, Nov. 16. Irish Finance Minister Brian Lenihan said earlier on Friday the country did not need to ask for EU help because of its substantial cash reserves. "The state is well funded into June of next year, we have substantial reserves, so this country is not in a situation or position where it is required in any way to apply for the facility," he said in an interview with RTE television. "Why apply in those circumstances? It doesn't seem to me to make any sense. It would send a signal to the markets that we are not in a position to manage our affairs ourselves," he said. (Additional reporting by Patricia Zengerle in SEOUL, Carmel Crimmins and Jodie Ginsberg in Dublin; Writing by Noah Barkin; Editing by Ruth Pitchford) ($1=.7332 Euro) Keywords: G20/IRELAND COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.
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