IRELAND’S BORROWING costs touched record highs yesterday despite upbeat notes from international analysts.

Ireland’s sovereign bond yield hit a euro-era record of 7.87 per cent ahead of EU Economic Commissioner Olli Rehn’s meeting with Minister for Finance Brian Lenihan last night.

Meanwhile the spread – or premium – investors demand to hold Irish debt instead of benchmark German bunds widened to 5.48 per cent on 10-year money, the most since Bloomberg began collecting the data in 1991.

However, Nomura International predicted yesterday that this spread may stabilise. “This crisis, fuelled by little true news, has entered a new phase and we expect some shorter-term stability,” a team of analysts led by Nick Firoozye in London wrote in a research report yesterday.

Bank of America Merrill Lynch reiterated its positive assessment on the sustainability of the Irish public finances yesterday, and predicted that when Ireland resumed bond auctions next year it was likely to face lower borrowing costs. “A decrease in debt interest costs will further help the decrease in the stock of debt,” it said.

However, in a report entitled The Sword of Damocles over Ireland, NCB chief economist Brian Devine warned that unless market sentiment changed dramatically, Ireland would face serious difficulties when it returned to the funding markets in 2011.

He said Ireland would need either to “mobilise domestic options” or call on the European Financial Stability Facility (EFSF), the eurozone emergency fund for sovereigns cut off from markets.

“It is increasingly looking like the EFSF is the most likely scenario,” Mr Devine wrote. “If there is not a dramatic change in sentiment we actually believe that it would be a positive for both the Irish economy and the bond market were Ireland to ask for the EFSF.

Plans would be laid down in black and white and worries about interest costs would subside as they would be largely known.”

Ireland’s difficulties are being amplified by German proposals to force bondholders to foot some of the bill in any future bailout.

“It’s not helpful to suggest Europe is going to restructure other countries’ debts,” Mr Lenihan said last week.

Credit-default swaps on Ireland and its banks also surged to record high levels yesterday on concern the cost of bailing out the nation’s financial system is unsustainable.

Contracts on Ireland soared 28 basis points from a record closing level to 606 (6.06 percentage points), according to data provider CMA.

– (Additional reporting: Bloomberg)