When Anglo Irish Bank revealed its latest €8.2bn loss last week, the annual interest rate for Ireland to borrow for ten years again tested dangerous levels and the premium over the interest rate in Germany, the euro's anchor tenant, reached a new record.

It was a far cry from the traditionally sleepy summer weeks for the sovereign bond markets; instead through July and August they have significantly raised the stakes on Ireland.

Last week the International Monetary Fund (IMF) published a research note on the reasons why it believes European countries, specifically Ireland, will not default on their sovereign debts. The timing could not be more significant.

The markets are betting that Ireland, and possibly Portugal and Spain too, will be forced sometime in the future to seek to negotiate haircuts on their sovereign bond debt with foreign lenders. In short, the Irish government's austerity plan has run out of road and the country is at the mercy of the markets.

Since spring it has relied on the buying might of the European Central Bank to soak up Irish bonds in the secondary market that people do not want. With the cost of borrowing new money matching levels paid by so-called emerging economies, the government faces a testing autumn and winter.

It's a predicament that has even evoked the sympathy of international commentators, including a supportive editorial last week in the Financial Times. Receiving condolences from international newspapers in the face of hard-nosed market bets is an uncomfortable place for Ireland's sovereign citizens to find themselves in.

The IMF's 'Default in Today's Advanced Econ­omies: Unnecessary, Undesirable and Unlikely' can therefore be read as an attempt by the Washington researchers to marshal arguments against the markets' proposition that an Irish or Spanish or Portuguese default is inevitable.

"For some peripheral European countries," says the IMF, "market participants and some commentators occasionally seem to believe that default – here intended as some form of debt restructuring – will sooner or later inevitably occur."

In case there might be any doubt as to whether or not Ireland is included in this unfortunate frame, senior IMF staffers Carlo Cottarelli, Lorenzo Forni, Jan Gottschalk and Paolo Mauro say, "concerns about fiscal solvency in these (European) countries have been reflected in financial market pressures, large default risk premiums on sovereign bonds, and downgrades by rating agencies".

The researchers go on to argue six major reasons why the markets, which got it wrong in the past, have got it wrong again in betting on the inevitability of a default by Ireland, Greece, Spain or Portugal.

Ireland will be hoping that the IMF's arguments prevail in the coming weeks.

Six reasons why Ireland will default

1) Default cannot be avoided because the necessary tax rises and spending cuts are just too large: ten advanced countries surveyed need to turn average so-called primary or underlying annual deficits of 5% of GDP (much higher in Ireland's case) to a surplus of 1% in a few years. That's just too much pain for citizens in the stressed western European countries to bear.

2) Default cannot be avoided because high interest rates make the burden of debt unsustainable.

3) It makes sense to default once a country has reduced its underlying annual deficit. It may seem bizarre, but a default can be appealing to a country after it does all the heavy lifting of cutting its annual deficit – it saves on the interest bill on the renegotiated debt and it need not cut any more.

4) Default cannot be avoided in countries with an overvalued exchange rate (Ireland arguably with the euro) because the needed real depreciation would further raise the public debt ratio. Over-valuation in the case of Greece is arguably as much as 30%. For countries in the eurozone, deflation implies an increasing debt to GDP ratio.

5) Politically, it is easier to default because it is easier to soak the rich and foreign debt-holders than to face protests from the lower middle classes. In the case of Greece and Ireland, a big chunk of the sovereign debt is held by foreign banks.

6) Default cannot be avoided because fiscal adjustment will depress growth.

Six reasons why Ireland won't default

1) Turning around big deficits is not unprecedented after all, says the IMF. Its research suggests advanced economies turned around average deficits of more than 7% of GDP no less than 14 times in the last three decades. Moreover, there is little benefit for in negotiating haircuts on the value of sovereign bond debt because the savings on the interest bill are not huge.

The IMF's bottom line: big cuts, though difficult, will be possible.

2) Real interest rates in advanced economies are lower than those in economies that defaulted in the past.

The IMF's bottom line: the cost of borrowing is not as high as it may appear.

3) History shows that countries that cut their deficits do not then go on to default to save on the interest bill. Austria in 1997, Belgium in 1984, Greece in 1994, Ireland in 1984, Italy in 1991, Japan in 1981, Portugal in 1986 and Sweden in 1996 all had sovereign debt piles significantly over 60% of GDP and went on to record large surpluses.

4) Ireland is not going to leave the euro. The IMF's bottom line: even leaving the euro would not obviate the need for major cuts.

5) EU integration means a default on debt held by a 'foreign' bank would soon hit back home. The IMF's bottom line: in cutting spending, it is crucial to protect the vulnerable, increasing the chances of political support.

6) Defaulting would do more damage to recovery than cutting deficits. The IMF's bottom line: cutting deficits should diminish the likelihood of a country failing to tap debt markets.