Time is running out for Ireland.

The debt-plagued country is being urged to accept a bailout to quell worries about its solvency, and to stop the turmoil in financial markets that is endangering weak members of the eurozone.

Yields on Irish and Portuguese bonds, which have been rising for the past two weeks, blew out on Thursday with yields on 10-year Irish bonds climbing to more than 9 per cent. Markets stabilised on Friday, after European Union finance ministers promised that private investors would not be liable for any losses for eurozone bailouts that took place in the next three years. As a result, Irish bond yields dipped back to 8.5 per cent.

Senior German and French officials will be deeply worried that this nervousness about the debt levels of the weaker eurozone countries has surged despite the $US1 trillion “shock and awe” IMF emergency rescue package that was unveiled by the European Union and the IMF in May that was supposed to put such fears to rest for several years. And the weaker eurozone countries now face much higher interest rates, even though the European Central Bank is trying to ease interest rate pressures by buying their bonds.

One risk is that Ireland, Portugal and Greece will face an even greater slump in economic activity and employment as a result of higher interest rates, which will reduce their tax receipts and make it even more difficult for them to cut their budget deficits. There are also fears that bondholders (such as banks, pension funds and insurance companies) may soon have to recognise that they are sitting on huge losses on their holdings of Portuguese, Irish and Greek debt, and will eventually be forced to write-down the value of their investments.

But senior EU officials are even more worried that nervousness about the ‘peripheral’ eurozone economies will prove contagious, and could spread to Italy and Spain, the third and fourth largest economies in the eurozone.

So far, Ireland is resisting signing up for EU-IMF rescue package, which would be a humiliating loss of economic sovereignty for the country.

Instead, the Irish government is pledging to improve the country’s finances which were badly dented by the cost of bailing out the country’s banks. The Irish government plans to slash €6 billion from its 2011 budget deficit — expected to be introduced into the Irish parliament early next month — and a further €9 billion over the following two years. This would reduce the budget deficit, which is currently running at 32% of GDP due to the one-off cost of bailing out the Irish banks this year — to below the eurozone limit of 3% by 2014. What’s more, the country stresses that it has enough cash to last until April next year.

But some European officials are concerned that Ireland is taking too leisurely an approach to the financial crisis that is engulfing the country. They argue that if Ireland’s budget credibility would be boosted if the country applied for an EU-IMF emergency loan, because it would mean that EU and IMF officials would be scrutinising Irish spending cuts. They also believe a loan would help the country deal with the cost of recapitalising the Irish banks, which suffered devastating losses following the collapse in the country’s property market. (See Ireland’s brutal bankruptcy reality, November 9.)

Unless financial markets stabilise this week, there’ll be growing pressure on Ireland to put its hand up for EU-IMF financial assistance, dealing a cruel and final blow to the pride of the former Celtic Tiger.

This article first appeared on Business Spectator.