Debt tensions flare up as Ireland denies bailout

The Irish Department of Finance said in a statement it is pursuing "contacts at official level" with other eurozone governments and the EU - but at the same time, aides to Finance Minister Brian Lenihan emphasized Ireland has no need for a lifeline from the euro750 billion financial backstop for the eurozone, maintaining that the country had enough cash to last through mid-2011.

In the meantime, Greek Prime Minister George Papandreou went on record as saying that said German pressure to create a mechanism that would let governments default on their debts in the future was ‘scaring off’ desperately needed investors.

"Whether understood or misunderstood (the German proposal) created a spiral of higher interest rates for the countries that seemed to be in a vulnerable position — such as Ireland and Portugal," Papandreou said. "But this could break backs. This could force people into bankruptcy."

Papandreou's comments came as EU statistics said Greece's 2009 deficit had reached 15.4 per cent of GDP, up significantly from a previously estimated 13.6 per cent.

While the upward revision had been well telegraphed to the markets, it underlined the difficult task Athens faces in getting its deficits below 3 per cent by 2014, as specified in its euro110 billion bailout agreement in May.

Thee latest hiccups could pile on added pressure onto EU finance ministers, who will be in Brussels today for their monthly meeting.

Analysts have said that investors needed the finance ministers in Brussels to offer a clear path forward for Ireland to reduce its deficit and bear the costs of its enormous bank bailout. Otherwise markets would continue to dump the bonds of EU's peripheral nations.

Portugal's Finance Minister Fernando Teixeira also saw himself forced to deny that his government had sought financial aid."Portugal has made no official or informal contacts with a view to seeking European aid," he said, but adding that "if Ireland's situation deteriorates" the market pressure on Portugal would increase.

He insisted that Portugal is "not in a position of unsustainability" and denied reports Lisbon had tried to influence Ireland's decision on whether to accept aid.