Euro slips on Irish debt woes

The euro fell for a second day Monday as concerns grew about a possible return of Europe's debt crisis.

Shares in Irish banks hit record lows as investor fears grew that the country will eventually need a bailout by the European Union and the International Monetary Fund.

Interest rates on Irish debt reached new euro-era highs as the government prepared to discuss its fiscal survival plans with the EU's economic commissioner.

At mid-afternoon in North America, the euro was down 0.8 per cent against the U.S. dollar to $1.3921 US. Gold rose to a new high, above $1,400 US an ounce.

The EU and IMF bailed out Greece in May.

"It is increasingly looking like the European Financial Stability Fund is the most likely scenario," said Brian Devine, chief economist at NCB Stockbrokers in Dublin, after another day when buyers boycotted Irish treasuries.

He said Dublin's primary dealers in bonds don't believe they "can drum up sufficient demand for Irish bonds at feasible rates."

The interest rates charged on the treasuries of Ireland, as well as fellow indebted euro-zone members Portugal and Spain, have been rising since German Chancellor Angela Merkel last month said she expected any future EU bailouts to come with new rules requiring bondholders to absorb some losses.

But Ireland has been the worst hit, as traders responded to its projected deficit of 32 per cent of GDP, a modern European record.

Ireland has said it has sufficient cash until mid-2011 and planned to resume bond auctions in January.

Last month, the government stopped trying to sell new bonds because of the punitive interest rates demanded by investors at the last auction in September.

Its bank stocks and bonds have been dropping since Finance Minister Brian Lenihan last week announced plans to slash $8.35 billion US from its 2011 deficit, double his previous target.

Lenihan said he wants to cut the 2011 deficit to 9.5 per cent and reach the EU's limit of 3 per cent by 2014.

Record rates on Irish debt

Increasingly, analysts say Lenihan doesn't have a credible chance of doing this by relying on markets that have driven Ireland's borrowing costs higher.

The yield on Ireland's 10-year treasuries rose to another record Monday of 7.87 per cent, breaking the previous record of 7.82 per cent set last week.

In the 16-nation euro zone, only Greece's bonds command a higher premium of 11.3 per cent.

Investors worry not only about what the debt crisis means for Europe's peripheral economies but also to those banks in Britain, Germany, the United States and France that hold Irish debt.

Bank of Ireland and Allied Irish have received billions in state aid to cover their dud loans to bankrupt construction tycoons, while Irish Life & Permanent has received no bailout help but is most exposed to Ireland's depressed market for residential property.

Olli Rehn, European commissioner for economic and financial affairs, arrived in a police motorcade outside the Finance Department in Dublin to hold evening talks with Lenihan.

Rehn also planned to meet Tuesday with leaders of opposition parties, business groups and labour unions.