David Prosser: Ireland stares into the abyss

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The Independent Online

Outlook Another day, another move towards the chasm for Ireland, a country the markets are slowly but surely dragging towards the brink. The yield on 10-year Irish Government bonds is now at 8.7 per cent, some 6 percentage points more than Germany, a fellow member of the European single currency.

Of itself, that figure means little to Ireland, which is not in the position of needing to refinance its debts today. But it is an indicator of investors' views of the country. It is the market's assessment of all of the gossip and speculation about International Monetary Fund or European Union bailouts being just around the corner.

What's striking, however, is that there is very little new newsdriving this sudden lurch towards the abyss. Olli Rehn, the EU'sEconomic Affairs Commissioner was in Ireland this week and says he believes the country's plans to reduce the deficit are credible – and that market confidence will improve once the Government publishes its four-year fiscal plan, which is due within weeks.

Moreover, the cuts already promised are so far being delivered and tax revenues are actually coming in slightly ahead of expectations. The latest banking bailout last month was praised as realistic.

So why the panic? Well, one issue is the political infighting in the coalition, which threatens the Government's stability. Another is that the deficit plans rely on growth forecasts that many independent economists believe to be too high. Then there is the possibility of a housing crisis, which would do yet more damage to the banks.

Above all, however, the power of the market is conspiring against Ireland. Investors have turned against the country – winning them back will be rather like turning an oil tanker: slow and difficult.

There isn't much time – Ireland will need to return to the bond markets in a few months and only has enough money to last until April. If the cost of borrowing then remains at today's levels, the Government will have no choice but to seek a bailout.

It is all thoroughly miserable. Ireland did what the bond markets asked it to, introducing unrivalled austerity cuts in order to begin restoring its finances. Though those cuts have already begun to cause misery, the markets are now demanding more. But to take even more out of the Budget would be to give up hope of economic recovery and to accelerate the death spiral.