By Daily Mail Reporter
Last updated at 1:42 PM on 25th November 2010
- Belgium's debt reaches 100% of annual national income
Contagion: Portugal, Spain and Belgium are viewed as the 16-nation eurozone's next weakest links
- Portuguese and Spanish borrowing costs rise sharply
- Standard & Poor's reduces Ireland's credit rating to A
- Eire PM resists EU pressure to raise corporation tax
- Irish families each face 4,600 euro bailout bill
- European Finance chief: 'There is zero danger. It's inconceivable that the euro would collapse'
New fears have been raised about the future of the euro with the domino effect of faltering economies spreading today.
The latest nation to get sucked into the crisis is Belgium after market traders pushed the cost of insuring the country's debt to record levels.
The rising cost of Belgium's debt is now 100 per cent of annual national income. That is raising concerns the country could join Portugal, Spain and Italy on the growing list of countries that could be heading for a financial crisis along with stricken Ireland.
The eurozone was dealt a further blow yesterday after Portuguese and Spanish borrowing costs rose sharply as investors worried that their debt levels will prove unsustainable, putting them next in line for a European bailout.
Portugal and Spain are viewed as the 16-nation eurozone's next weakest links now that Ireland has followed Greece and accepted a massive international rescue package
As a major public sector strike in Portugal further undermined market confidence there, the interest rate on the government's 10-year bonds broke through the 7 per cent barrier yesterday. The 10-year Spanish bonds rose to 5.08 per cent from 4.91 per cent at the start of trading.
While both countries are not at any immediate risk of bankruptcy, those rates are making their already heavy debt loads more expensive to finance. The higher cost to roll over debt is eating away at any progress the governments make in their public finances through austerity measures.
The yields have been moving higher since Ireland accepted an EU-IMF bailout this week because investors demand a higher return for lending to countries with shaky finances.
Dominoes: The collapse of Greece and Ireland's economies could have a knock-on effect on other nations
Traders are also worried Belgium's broken political system, which has left it without a government since April, is distracting it from� tackling its worsening economic outlook.
The government of Yves Leterme collapsed in April after he failed to find a resolution to a three-year internal dispute between the country's Flemings and Walloons.
Despite the growing unease over the success of the Irish bailout and fears that Portugal or Spain might need help soon, a senior official said today the crisis will not lead to the breakup of the eurozone.
European Financial Stability Fund chief Klaus Regling said: 'There is zero danger. It's inconceivable that the euro would collapse.'
Mr Regling, who has overseen the eurozone's 440billion euro bailout fund since it was created last spring, said Ireland was not suffering from rampant speculation, but rather from a lack of buyers for its bonds.
'We're experiencing a buyer's strike, not wild speculation', Regling said. 'And there's some uncertainty around whether the crisis will spread to other countries.'
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Guaranteeing Ireland's solvency is also seen by EU governments, and officials in Dublin, London, Brussels and Frankfurt, as essential to protecting the euro as a currency.
'Contagion' has been the fear across Europe with worries the Irish financial and economic chaos will spill over to troubled nations like Portugal, Spain and Italy.
Yesterday Ireland embarked on one of most draconian austerity programmes of any developed economy since the Second World War.
Prime minister Brian Cowen unveiled plans to slash public spending by 20 per cent over the next four years to tackle the Republic?s soaring budget deficit.
The harsh medicine will include a 12 per cent cut in the minimum wage, nearly 25,000 civil service job losses and a punishing rise in the VAT and income tax rates.
Fianna Fail and the Greens launched a four-year, 15billion euro savings blueprint - equivalent to over 8,300 euro per household.
As Ireland battled to avoid national bankruptcy, estimates put the bailout bill for the average Irish family at 4,300 euros.
Painful cuts: Ireland's prime minister Brian Cowen, right, and finance minister Brian Lenihan announce the National Recovery Plan in Dublin today
Ireland's prime minister Brian Cowen, who is resisting calls to resign over the financial crisis, yesterday warned 'no one could be sheltered' from the cuts.
He rejected claims he will stand down after the 2011 Budget is unveiled in December to allow a new leader to fight the imminent general election.
Mr Cowen likened the agreed bailout to an overdraft as negotiations on exactly how the money can be drawn out continue.
He said in the Dail: 'We're talking about here, an overdraft, if you like. It's a contingency, it's available to us as required.'
IRELAND'S FOUR-YEAR PLAN
- The minimum wage being cut by one euro to 7.65 euro (�6.48);
- VAT increasing one per cent to 22 per cent in 2013 and to 23 per cent in 2014;
- Public sector workforce being cut by 24,750, bringing levels back to 2005 levels;
- An increase in student fees;
- Water metering brought in by 2014;
- Carbon tax charges doubling to 30 euro (�25) a tonne
Measures being brought in include cutting social welfare by three billion euro (�2.5bn), reducing the public sector pay bill by 1.2 billion euro (�1bn) and increasing VAT by two per cent.
The credit ratings agency Standard & Poor's has lowered its long-term rating on Ireland's financial reliability by two notches to A from AA- and warned that there could be further downgrades
However, the plan does not touch the country's ultra-low corporate tax rate - which contributed heavily to the so-called 'Celtic Tiger' economic boom, by attracting companies to the country.
Despite pressure from Germany and France, Mr Cowen is retaining his country?s controversial 12.5 per cent rate of corporation tax, which has attracted a slew of U.S. multinationals to Ireland?s shores over recent years.
The severe cuts equate to more than ten per cent of Ireland?s national income, compared with Britain?s plan to reduce public spending by about five per cent of output.Ireland?s ?day of reckoning? came as talks continued between the International Monetary Fund and the EU over a �72 billion bailout.
Britain will contribute at least �7 billion to the rescue.The Irish government has had to go cap-in-hand to the EU after escalating concerns over its finances threatened to capsize its crippled banking system.
The country?s budget deficit is set to hit 32 per cent of national output this year after Dublin was forced to pump some �42billion into its stricken lenders.
Banking and economic experts across Ireland and Europe have raised concerns in the last 24 hours that it might not solve the problem.
There are also worries in some circles of a sustained bank-run by fearful customers.
Irish banks have already seen �19billion in deposits leave the country this year.
A statement in the National Recovery Plan said the measures would 'dispel uncertainty and reinforce the confidence of consumers, businesses and of the international community'.
It added: 'The tax and expenditure measures contained in this plan will negatively affect the living standards of citizens in the short term.
'But postponing these measures will lead to greater burdens in the future for those who can least bear them, and will jeopardise our prospects of returning to sustainable growth and full employment.'
Mr Cowen added: 'It's to bring certainty for our people.
'It's to ensure that they have hope for the future. To let them know that while we have a challenging time ahead, we can and will pull through, as we have in the past.
'It's a time for us to pull together as a people. It's a time to confront these challenges and do so in a united way.'
He said the plan would see workers facing taxes they paid in 2006 while the Government would oversee spending levels similar to 2007.
The Budget on December 7 will explain in detail how six billion euro (�5.1 billion) of the savings will be pushed through next year.
Mr Cowen rejected claims from backbenchers that he will step aside as leader of Fianna Fail before the end of the year.
EU Commissioner for Economic and Monetary Affairs Olli Rehn hailed the four-year plan as a ?sound basis? for negotiations on the final details of an international bailout, saying it struck a ?good balance?.
But economists warn that the measures could consign Ireland to years of economic stagnation, making it harder still for it to repay its debts.
Ben May of Capital Economics said it faces an ?insurmountable task of getting public debt down to a more sustainable level, which will eventually leave it no choice but to default?.
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