The difficult decisions underpinning Ireland's four-year budget plan will be set out when it is published, Minister for Finance Brian Lenihan has said.
Asked about spending ceilings for the various Government departments, Mr Lenihan said he preferred to see the firm policy decisions underpinning the plan being laid out.
Decisions on such issues as pensions policy, social welfare payments, public sector pay, transfer payments in the broad sense and investment policy would have to be set out, as these were the "drivers" of public expenditure. If such difficult decisions were not set out, the plan would lack credibility, he said.
Both Ireland and the EU believed the adjustment should be frontloaded with a €6 billion adjustment in the upcoming budget. "The crucial point is that the first part is adopted by the political system. That is absolutely crucial."
Mr Lenihan said Ireland is using the diplomatic service to try to undo the damage done by the position of the German government on the possibility of sovereign defaults. Irish bonds hovered close to 9 per cent today.
The Minister said the remarks on bondholders taking a hit post-2013 had caused unease in several EU member states and that the issue is likely to come up for discussion of the Ecofin ministers in the next 10 days. Ireland is trying to "ensure clarity" about its position on its sovereign debt.
It was his advice the recent turmoil in the bond markets was exclusively about this issue and had affected Ireland in particular because of its pre-existing position.
Markets are sceptical about the Government’s ability to pass the first of four austerity budgets next month.
Yields on the 10-year Irish Government bond closed at 8.906 per cent, compared with yesterday’s closing price of 8.636. The spread to the benchmark German bund was 647 basis points.
The National Treasury Management Agency cancelled the remaining auctions for 2010, although it is expected to return to the markets next year, and the Government is fully funded until mid-2011.
Fine Gael finance spokesman Michael Noonan said the Government had to use whatever diplomatic levers were available to it to get a statement on the matter from the Council of Ministers prior to the budget.
Former taoiseach Garret FitzGerald, who attended a press conference in Leinster House today, described the German position as "totally destabilising".
Shares in Irish banks were also under pressure, with Bank of Ireland closing 7.9 per cent down at 38.4 per cent and AIB slipping 6.7 per cent to 33 cent. Irish Life and Permanent was down 10 per cent to 82 cent. UK banks with a large exposure to Ireland, including Royal Bank of Scotland, also slid.
European Commission president Jose Manuel Barroso signalled the EU was ready to act should countries such as Ireland require assistance.
European officials said they were monitoring developments in Ireland closely, with the Handelsblatt
newspaper quoting a German government source who said aid could be unlocked "very quickly" if needed.
"What is important to know is that we have all the essential instruments in place in the European Union and euro zone to act if necessary, but I am not going to make any speculation," Mr Barroso said at a G20 summit in Seoul, when asked whether Brussels would need to act to support Ireland.
European plans to create a permanent rescue mechanism under which private debt holders would help shoulder the cost of future euro zone bailouts have increased pressure on Ireland and economies such as Portugal.
Although Germany has made clear the new mechanism would not apply to existing debt, the plan has spooked markets, raising fears of a domino effect on peripheral euro members that only weeks ago appeared to have weathered the worst crisis in the single currency region’s 11-year history.
European Union and International Monetary Fund officials said yesterday Dublin had not requested financial aid under a new rescue mechanism known as the European Financial Stability Facility (EFSF), which the region set up in May to stem contagion from Greece's meltdown.
Mr Lenihan also insisted that the country would not need a bailout.
In a research note today, Bank of Tokyo-Mitsubishi UFJ said Ireland may need external help to contain its sovereign debt crisis as evidenced by the surge in bond yields.
"The surge of yields across the curve suggests that Ireland will now eventually require external financial assistance," Derek Halpenny, head of European currency strategy in London, wrote. "Ireland's saving grace for now is the fact that it doesn't require funding from the market."
The IMF has said markets are overestimating the risks of default in a number of countries. A recent report said that of the 36 instances in the last two decades where a country's yield spreads rose above 1,000 basis points, only seven resulted in default.
In the other 29 cases, spreads eventually fell back with no default.
Additional reporting: Reuters, Bloomberg