The cost of borrowing increased today as Irish bonds yields moved higher, rising above 6.3 per cent to a record high.
At 2.46pm, the premium investors demand to hold Irish 10-year bonds instead of the benchmark German bund rose to 6.31 per cent. Bond spreads widened to 388 basis points.
Traders said the move was down to a number of factors, including recent talk of the International Monetary Fund intervening in Ireland's financial affairs, and speculation about defaulting on debt.
Minister for Finance Brian Lenihan said the Government isn't facing difficulty raising funds and that the increase in the country's sovereign-bond yields this week is "normal" before a debt auction.
Asked about a Barclays Capital report yesterday that Ireland may need external aid at some point if conditions worsen, Mr Lenihan told reporters that "what it said was that the Government was taking the right steps at the right time".
The Department of Finance said in a statement that there is "no truth in a rumor" that the government may ask for aid and that it is based on a "local misinterpretation of a research report".
"The market is built on trust," said Bloxham sales trader Ian Huggard, "and Ireland is a recognised 'basket case' in peripheral Europe.
"It doesn't take a lot to trip the switch."
However, Mr Huggard said he didn't think Ireland would default on its debt, and speculated that the rise in bond yields could be opportunistic selling ahead of a planned auction later this month.
Germany's 10-year bund gained, erasing an earlier decline, as speculation that banks in the euro region may incur deeper losses spurred demand for the euro- region's safest assets.
The gains pared the 10-year bund's third straight weekly drop. Two-year securities also gained as yields near a seven week high boosted demand for the securities
Earlier today, Green Party leader John Gormley warned that renegotiating with Anglo Irish Bank bond holders could widen the country's bond spreads.
"You could be cutting off your nose to spite your face," he said told RTE Radio today. "You have to act very cautiously because you could find then that the spreads increase."
However, Opposition politicians said the Government should negotiate with Anglo's bond holders "on a fair and equitable arrangement".
"The opposition is now unified behind Fine Gael's policy that bond holders should share in the burden of winding down Anglo Irish," said the party's deputy finance spokesman Kieran O'Donnell.
Separately, the National Treasury Management Agency (NTMA) said it planned to sell up to €1.5 billion of bonds in an auction on September 21st. Bloxham's Huggard said the NTMA could put off the auction, but risked affecting market confidence. "I think they'll proceed," he said.
Irish bond yields have risen in recent weeks as concerns persist over the rising cost of bailing out the banks.
However, Davy analysts said the recapitalisation of the banking system would not lead to insolvency.
"Concerns have increased that the ultimate cost of recapitalising the banking system, combined with weak public finances, will result in a default by the Irish government," the note said.
"However, given our estimates of these costs (even under stressed scenarios), together with gradual underlying improvements in the public finances, we believe that this is a very unreasonable conclusion."
Davy said the Government had already pre-funded this year's Exchequer requirements and part of next year's.
However, it warned that Ireland still faces many challenges, including communicating the reality of its stabilisation efforts to a sceptical audience at home and abroad.
