Germany's Angela Merkel Leans On Irish to Fix Economy

German Chancellor Angela Merkel doesn't have many fans in Greece. Many in the Mediterranean country feel that Germany was aggressively accusatory earlier this year when it came to Athens' severe national debt and budget deficit problems. Bitterness has only increased as tough austerity measures have taken hold.

Now, though, it would appear that Merkel's popularity has plummeted in several more European countries, Ireland being chief among them. Ever since European Union leaders agreed in late October to a Berlin proposal that foresees the possibility of bankruptcy proceedings for euro zone countries -- including potential losses for holders of sovereign bonds -- interest rates have skyrocketed on those bonds. On Wednesday, Irish bond yields rose for the 12th day in a row -- closing at 8.7 percent on Wednesday -- indicating that investors are increasingly losing faith in the country's ability to pay back debt.

"The main reason why spreads have remained under pressure isn't further divergence in budget fundamentals," Luca Jellinek, head of interest-rate strategy for Credit Agricole, told Bloomberg. "Rather, it stems from fresh evidence that inter-government solidarity within the European Monetary Union remains limited and possibly fragile."

While European officials have spent the week insisting that the EU would come to the support of Ireland should it become necessary, both Merkel and French Foreign Minister Christine Lagarde have increased pressure on Ireland in recent days. On Wednesday, Lagarde made the clearest statement yet that France supports Germany's position on debt restructuring for crisis-ridden euro zone countries.

"All stakeholders must participate in the gains and losses of any particular situation," Lagarde told Bloomberg television.

Merkel, for her part, has refused to soften her stance. In Seoul on Thursday for the G-20 summit, she said "we also need creditors to be involved in the costs of restructuring. ... We can't constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks."

The EU plans to present an initial proposal for how such a restructuring mechanism might work by December. The idea is to draft rules that will take effect once the €750 billion euro ($1.02 trillion) rescue package, set up earlier this year, expires in 2013.

European Commission President Jose Manuel Barroso, in reference to that bailout fund, insisted on Thursday that Brussels was prepared to come to Ireland's aid. "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."

The fund, worth a total of €750 billion (close to $1 trillion), includes €440 billion in guarantees coming from members of the euro zone and a further €60 billion coming from the European Union. The International Monetary Fund is contributing the remaining €250 billion to the fund. And the IMF's involvement in the fund and the specter that it might be involved in setting the terms of any bailout contributed to driving up the country's borrowing costs on Wednesday.

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