Europe’s debt crisis flares again as Irish bond yields rocket

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Even as the European Union moves this week to finalize its permanent financial rescue fund for struggling member nations, rumors that a government-controlled Irish bank would miss a bond payment stoked fresh fears in European debt markets Tuesday.

The annualized yield on two-year Irish government bonds (charted below) rocketed to a record 9.87% from 9.25% on Monday.

The Irish two-year yield now is 15 times the 0.65% yield the U.S. Treasury pays on its two-year debt.

The rumor that hit the market was that Allied Irish Banks, which was nationalized by the Irish government last year amid huge loan losses, would fail to make a scheduled bond payment due Wednesday.

The bank denied the rumor, but the markets’ jitters showed how on edge investors still are about Europe’s debt crisis.

The Irish government has stepped in since 2008 to rescue its biggest banks, but that hastened the government’s need to seek its own bailout from the European Union in November. Ireland, struggling with a painful austerity program, now wants better terms from the EU.

The new EU rescue fund would charge member nations lower interest rates to borrow than the current temporary fund, but the permanent fund won’t begin operating until 2013.

Meanwhile, Portugal’s prime minister has threatened to resign if opposition parties on Wednesday vote to reject a government austerity plan aimed at keeping Portugal from needing an EU bailout.

The fear has been that if Portugal couldn’t stand on its own, Spain -- a much larger nation -- also could be forced to turn to the EU, further unnerving investors who wonder where it all will end.

The yield on two-year Portuguese government bonds rose to 6.50% on Tuesday, up from 6.38% on Monday and just below the recent high of 6.52% reached March 11.

-- Tom Petruno