Specter of Irish bailout looms

Europe's sovereign debt crisis is flaring up again and Ireland, the center of focus this time around, is pushed closer to needing a bailout.

Michael Noonan, the finance spokesperson of Ireland's opposition party Fine Gael, said he believes an EU intervention could come within 24 hours. Moreover, the Irish Independent said Irish Finance Minister Brian Lenihan is considering requesting aid for the country's struggling banks.

Ireland has one of the most vulnerable banking sectors in Europe and the government has incurred huge liabilities supporting it. The sovereign debt problem and banking problem are integrally linked.

Reuters reported that Noonan, speaking to BBC, said the bond market isn't distinguishing between bank debt and sovereign debt. Moreover, he said it is difficult to imagine a scenario where Irish banks are bailed out but the Irish sovereign isn't eventually.

The Eurogroup, comprised of the finance ministers of the euro zone, are meeting on Tuesday and the ECOFIN, comprised of the finance and economic ministers of euro zone, are meeting on Wednesday. Bailouts for Ireland's sovereign debt and/or banking system will likely be discussed at those meetings.

Last Friday, there were rumors of an 80 billion euro bailout for Ireland as the country's cost of borrowing soared to historic levels. Analysts said those borrowing costs were unsustainable.

Ireland, however, has persistently denied rumors that it is seeking a sovereign or bank bailout and said it is fully funded until the middle of next year.

However, the borrowing cost for Ireland is now perhaps higher than what it would receive from tapping into the European Union's European Financial Stability Facility (EFSF) or even the IMF.

Nevertheless, Ireland is reluctant to request such assistance/bailout because doing so will restrict its ability to borrow from the capital markets in the future. Moreover, Noonan said Ireland may be forced to give up some control over its budgetary policies.

Two-thirds of economists and bond strategists polled by Reuters expect Ireland to request bailout before 2011.

Email Hao Li at hao.li@ibtimes.com.