The Irish Independent reports that a new bout of nerves on financial markets sent the interest rate on Irish government debt to the highest levels since the formation of the euro in 1999.

At one point the yield for investors in Irish government bonds topped the psychological 6pc level, before easing back slightly. The yield on 10-year bonds surged by a quarter of a per cent, leaving a gap of 3.69 percentage points over German bonds. There was even greater turmoil in the market for short-term loans, with a 0.29pc rise in Irish two-year bonds -- the biggest recorded for any eurozone country yesterday.

In Brussels, Finance Minister Brian Lenihan said the spike in borrowing rates "reflects wider European trends". He insisted the issue of Ireland tapping the EU stabilisation fund -- for countries having difficulties with borrowing on markets -- had not been raised over the course of the two-day meeting of finance ministers.

"We have not [asked about external help] because the markets have remained open to Ireland throughout the economic crisis," he said.

Mr Lenihan added that the Government was "satisfied" it could identify what the final cost of covering losses at Anglo Irish Bank would be.

"We will need to hold our nerve and identify the precise losses and demonstrate how these losses can be worked out over a period of time," he said.

The minister declined to be drawn on suggestions the European Central Bank (ECB) had stepped in to curb rising yields on Irish debt by buying bonds.

"That's a question for the ECB," he said.

Tomorrow, the National Treasury Management Agency (NTMA) is to auction up to €600m of short-term bonds, repayable over the next six months.

This may give some guide as to whether the bond markets are accurately reflecting the cost of borrowing for the State.

The NTMA is due to have a more significant auction of up to €1.5bn in long-dated bonds on Tuesday week.

So far, there is no indication that this will not take place, but NTMA executives will take soundings among lenders during the next two weeks.

Traders blamed fears about the state of eurozone banks as one reason for the latest flight into safer, low-yielding bonds, and away from those of peripheral eurozone countries.

An article in yesterday's 'Wall Street Journal' said some EU banks understated their holdings of potentially risky government bonds in the recent "stress tests" of 91 of the largest banks.

"Because of the limited nature of most banks' disclosures, it is impossible to gauge the number of banks that excluded portions of their sovereign portfolios from their disclosures, or the overall effect of that practice," the newspaper said.

"You have to be an adrenaline junkie to be very active in those markets," Frances Hudson, head of global thematic strategy at Standard Life Investments, told Bloomberg.

"We aren't heavy in any of the peripherals."

Poor figures on German manufacturing orders also added to fears over global growth. Renewed economic weakness could spell trouble for countries wrestling with large budget deficits, such as Greece and Ireland.

"This data warns of weakness in output in the coming period," said Marc Chandler, head of global currency strategy at BBH in New York.

The Irish Independent also reports that the Government is poised to make a final decision on the future of embattled Anglo Irish Bank at a cabinet meeting today.

Anglo's day of reckoning comes after Monday's crunch talks between Finance Minister Brian Lenihan and the European Commission's state aid chiefs.

Speaking in Brussels last night, Mr Lenihan said Anglo's controversial plan to split itself into a 'good bank' and a 'bad bank' had been comprehensively examined. "The commission has expressed an opinion on it, not a binding opinion, but a view," he said.

"The Irish Central Bank has expressed a view, the National Treasury Management Agency has expressed a view and my department are working on it. All these opinions are being brought to the Government so they can make a decision."

Asked if the Government would be in a position to announce its preferred route for Anglo today, Mr Lenihan said he "anticipated" the Cabinet would "look at the options and come to a conclusion on the matter".

He declined to be drawn on whether the Government will, as widely expected, reject the good bank/bad bank proposal.

Wind-up

Anglo's bosses have argued that the €25bn cost to the taxpayer will be €4bn to €5bn higher if the good bank is jettisoned and Anglo is forced to wind down its entire book.

Mr Lenihan declined to say whether he accepted the figures. He did confirm, however, that there was no prospect of the Government pushing for an immediate wind-up of Anglo.

Anglo bosses say the cost to the taxpayer could be €45bn in the event of an immediate liquidation, while Taoiseach Brian Cowen has mooted a figure as high as €70bn.

While the Government's final decision on Anglo will mark a significant milestone, any strategy must be ratified by the European Commission.

"We are in the process of intensive negotiation with the commission," Mr Lenihan said, adding that a "a final resolution on the Anglo difficulties will be announced within weeks".

The Irish Times reports that State-owned Anglo Irish Bank has set aside a further €700 million for potential losses on borrowings to Seán Quinn, bringing to €1.7 billion the potential loss the bank expects to incur on loans of €2.8 billion owed by the businessman and his family, the newspaper has learned.

The increase on the expected loss on the loans to the Quinn family – Anglo’s biggest borrower – was taken in its accounts published last week covering the first six months of the year but was not disclosed by the nationalised bank.

The so-called bad loan provision of €700 million was included in the record six-month loss of €8.2 billion reported by Anglo.

The uncertainty over the future of Quinn Insurance, the most profitable part of Mr Quinn’s business, has forced Anglo to lower its expectation on how much of the loans it is likely to recover. Quinn Insurance was put into administration last March after the Financial Regulator expressed grave concerns about the company’s ability to cover its liabilities.

It’s understood that Anglo may be forced to set aside a further €500 million, though this may be the extent of the write-off as the bank has security worth about €600 million over the family’s extensive international property interests.

The bank has declined to comment, citing client confidentiality.

The Government has so far committed €22.9 billion to Anglo and the bank said that the cost to the taxpayer will not rise above €25 billion if there is no further decline in the property market or any unexpected losses on large customers.

This is also conditional on the National Asset Management Agency not paying any less than that paid for the previous tranches for the remaining €19 billion in loans it will buy from Anglo this year.

Quinn Insurance is on the market and Anglo has expressed an interest in taking control of the company to ensure the long-term repayment of the Quinn loans, although it is among a number of parties eager to take over the firm. Mr Quinn has said that his family would be able to repay the loans within seven years if the insurer remained within the control of the family and his group.

Anglo’s six-month losses included a loss of €5.8 billion on Nama loans and a further €2.5 billion on non-Nama loans. The bank’s management team met about 15 politicians from various parties yesterday to explain why they believe their plan to split Anglo into good and bad banks was the lowest cost to the State.

The bank invited the politicians to the evening briefing as Government Ministers lean towards a long-term wind-down of the bank.

The European Commission is expected to rule on Anglo’s restructuring plan within weeks.

The Irish Times also reports that Minister for Finance Brian Lenihan said the Government’s decision to seek approval for an extension to the banking guarantee followed recommendations from the Central Bank, the Financial Regulator and the National Treasury Management Agency.

The extension renews until December 31st the Government guarantee for short-term bank liabilities, including corporate and interbank deposits and debt securities whose protection is set to expire on September 29th.

Such liabilities were not covered by the European Commission’s decision in June to extend other strands of the guarantee scheme until the end of the year.

The development follows talks in Brussels on Monday between Mr Lenihan and EU competition commissioner Joaquín Almunia, who agreed to approve the extension.

Acknowledging that the European authorities were taken aback when the guarantee was first introduced in 2008, he said the original measure reflected the gravity of the crisis at that point and indicated that the situation remained serious.

“I think today’s decision by the commission confirms in a sense just how serious the problem was when Ireland still needs an extension of a guarantee of such a broad character.”

In advance of Cabinet talks today on Anglo Irish Bank, the Minister also discussed the rescue of the nationalised institution with Mr Almunia.

While the European authorities share the Government’s view that the question of the State’s ultimate liability to Anglo must be quantified as soon as possible, Mr Lenihan said he did not want to pre-empt the outcome of the Cabinet discussion.

“A final resolution of the Anglo difficulties will be announced in a matter of weeks,” he said.

“We are satisfied that we can identify what the precise losses are in our most distressed financial institution and we can deal with those losses over time.”

He declined to comment on the likelihood of a medium-term wind-down of Anglo, now widely expected, but made the point that “the bank has not been open for lending since it was nationalised”.

Mr Lenihan made public the decision to renew the guarantee last evening after a scheduled meeting of finance ministers whose countries share the euro.

“Ireland was far from being the exclusive focus of euro group today,” he told reporters as he prepared to return to Dublin.

Unusually, euro zone president Jean Claude Juncker did not hold a press conference after the meeting.

On a record spike in Irish bond yields, however, Mr Juncker expressed confidence in the Government’s capacity to weather the storm.

“We were listening carefully to our Irish colleague and all of us were convinced that the Government will be able to manage that situation,” Mr Juncker told reporters on the sidelines of the meeting.

Mr Lenihan said the renewal of the guarantee meant State protection would be available for both short- and long-term liabilities up to the end of the year.

The extension, publicly sought by Anglo Irish Bank and Allied Irish Banks, comes as Irish banks prepare to refinance several billion euros of debt in the coming weeks.

“This is an important support to the Irish banking system facilitating their access to both short- and long-term funding to help maintain the overall stability of the banking sector,” Mr Lenihan said.

The extension reflects fears that the holders of corporate depositors with up to three months’ maturity would move their money away from banks such as Anglo and AIB before the original protection over such deposits expired.

The Minister left open the question as to whether he would seek a further extension, saying it would be “unwise” to anticipate in public any further action.

The Irish Examiner reports that nervousness about the banking and budgetary outlook has played a part in an unwillingness of consumers to part with their cash.

Consumer sentiment weakened significantly last month, a contrast to improved confidence readings in other countries.

The fall in confidence in Ireland was also attributed to the end of the summer sales, holiday spending and back to school bills.

The KBC Ireland/ESRI consumer sentiment index weakened in August to 61.4, compared with 66.2 in July. However, the figure is still up from 48.7 in August last year and remains well above the all-time low in July 2008 of 39.6.

KBC economist Austin Hughes said the broad message from the August sentiment data is one of renewed nervousness among Irish consumers. "The main driver was a sharp pullback in spending intentions... However, it is clear that confidence remains very fragile and increased uncertainty is likely to make Irish consumers more cautious, implying downside risks to spending prospects in the months ahead."

The forward looking expectations index weakened to 52.1 from 53.1 in July, on the back of a more negative view of the outlook by consumers for the economy. Nearly half of consumers expect no improvement in the economy over the next 12 months.

David Duffy of the ESRI said: "The decline is mainly due to a more negative perception by consumers of the current buying climate. This may well reflect a post-summer sales effect."

Figures showed that in the US, consumer sentiment partly reversed the poorer trend reported there through the summer months.

Also in Europe, notably stronger economic growth contributed to an improvement in consumer confidence.

Mr Hughes said: "It would seem that the weakness seen in Irish consumer sentiment in August largely reflected domestic economic concerns," he said.

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