Present rates match those that prevailed for Greece before it was rescued by the ECB and IMF, writes ARTHUR BEESLEY

IRISH BORROWING rates climbed to yet another record in the hours before Minister for Finance Brian Lenihan unveiled a €6 billion package of budget measures for 2011. That the Government is not currently borrowing affords but a measure of comfort as the pressure will only intensify before its return to the market in the new year.

Several malign forces are working against Lenihan as he pushes against the tide to regain market confidence, not least the dire state of the public finances and the mountainous scale of the banking bailout.

He is not helped in his task, however, by an increasingly assertive German push for private investors to take their share of the pain in the event of future sovereign rescues in the euro zone. In the face of opposition from European Central Bank (ECB) chief Jean-Claude Trichet, chancellor Angela Merkel succeeded last week in bringing that very question to the forefront of the EU agenda.

Irish borrowing costs have been mounting ever since, breaching 7.8 per cent for 10-year money yesterday. This represents an increase significantly in excess of a full percentage point since last week, a rise that is causing no little apprehension in Frankfurt and Brussels.

Dr Merkel’s moral argument that it should not be left to taxpayers to shoulder the entire burden of adjustment in a sovereign debt crisis has its undoubted attractions. This is particularly so in the case of Germany, which is lending more to Greece than any other euro country and contributing the most to the general fund for any distressed member of the currency.

But Trichet and his supporters worry that opening the door to debt restructuring is an invitation for trouble in the markets. The ECB chief is not winning the argument, yet his concern about a return of instability rings true in the build-up of pressure this week on Ireland and Portugal.

Brutally exposed by its huge borrowing requirement, the Government is a sitting target in the present malaise. The situation is indeed grave. If the National Treasury Management Agency was in the market yesterday, it would have paid more than three times as much interest as Germany on every €1 million received from lenders. With a borrowing requirement this year of €20 billion – and numerous billions to raise in each of the next four years – the cumulative cost would be crippling. More and more money would be wasted on interest payments, reducing that gain from already painful austerity measures.

The present bond rates match those that prevailed for Greece shortly before it was rescued by the EU and the International Monetary Fund (IMF). This brings Ireland deeper and deeper into the danger zone, affirming the truth of the perception in Brussels and Frankfurt that a lot of things need to go right for the State to survive the storm.

At his monthly press conference yesterday Trichet brushed off two invitations to say whether he was in any way alarmed by the swift rise in Irish bond yield. Nevertheless, he took the opportunity to give a guarded welcome to the Cabinet’s commitment to adopt a €15 billion austerity plan up to 2014.

No matter how long the Government survives, in all likelihood it will fall to the parties now in opposition to deliver the bulk of the measures. Trichet, however, has sent a strong signal that the scale of adjustment required is in that order.

Although it presents a massive challenge, he also ascribed “extreme importance” to the decision to frontload the package next year. “I have no reason myself to think at the present moment that the observers will be disappointed,” he said.

The fact remains, however, that market players have been all too happy to relentlessly punish the Government for every single point of weakness in its position. There are many of those, foisting ever-larger cutbacks and tax hikes on the public.

While well-placed observers in Frankfurt and Brussels take some confidence from the stance of the Irish body politic in general and relative calm on the streets, there is a long distance still to travel.

Standing back from the political battle unleashed by Lenihan’s latest proposal, the immediate task is to quickly lance the expansion in Irish bond yields. That is no easy task for Irish bond rates are highly volatile at present and prone to rapid increase even if they do stabilise after the current outburst.

The return to the market presents the clear risk of another upsurge in pressure.

If that happens – and many believe it to be inevitable – all signs point to an escalation of the ECB’s acquisition of Irish sovereign debt.

Would that do the trick?

The bank has been to the market several times already – it bought more Dublin-issued paper again yesterday – but to little apparent avail. Therefore, any such intervention would likely be large.This is in addition to its purchase of tens of billions of euro in Nama bonds and the provision of copious liquidity to the banks.

The screw turns and turns.