The harsher-than-expected British budget may pile extra market pressure on Ireland, international analysts have said.
Even as eurozone sovereign interest rates steadied last week, Irish rates at 5.5% remain the second-highest in the eurozone after Portugal.
"The UK emergency budget proved to be tough enough to boost sterling," said Luca Cazzulani, deputy head of fixed income at UniCredit Bank in Milan. He predicted the euro would fall below 82 pence if worries about the debt outlook of the periphery eurozone countries, such as Ireland and Portugal, persist this week.
The international focus on Irish debt will likely continue despite GDP figures published later this week expected to show that the Irish economy is already out of recession.
The UK treasury forecast last week that British annual government deficits will fall sharply after British finance minister George Osborne announced larger-than-expected budget cuts. Britain will tell Brussels under the Growth and Stability Pact that it is committed to cutting its general government budget deficit to 7.6% of GDP next year from the current level of 10.1%, the highest in Europe along with Ireland and Greece.
According to the treasury documents, Britain forecasts that in the fiscal year 2012/13 its deficit will fall sharply to 5.6% and fall below the 3% ceiling permitted by the treaty by 2014/15.
Market rates for Britain to borrow money for 10 years fell 16 basis points last week to 3.37%, as holders of British debt bet that the cuts announced by the new coalition government would not plunge Britain into a new recession.
The bigger-than-expected cuts in Britain could worsen the international perceptions of Ireland, however.
In its economic "weather" outlook, the Financial Times website shows that, despite the economy growing 3% next year, the Irish budget deficit will widen to over 12% of GDP from 11.7% this year.
UniCredit's Cazzulani said that the euro "held the line" last week even as European stockmarkets fell and sovereign yield spreads and the costs of insuring sovereign debt rose across the eurozone. "But the euro-dollar rate should face more downward pressure due to the renewed clouded risk picture," he said.
The costs to insure against Irish bonds defaulting rose again last week, reaching their highest levels since March 2009.