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Cost warning for Ireland as Greek debt crisis grows

INCREASED worries about the Greek government's ability to service its growing debt is pushing up insurance costs for Ireland and other peripheral eurozone countries.

The fear is that the status of Greek debt might fall below levels accepted by the European Central Bank (ECB) for lending to the banking system.

The cost of insuring Greek debt against default rose by almost 0.13pc (13 basis points), taking the cost of insuring €10m of debt exposure to more than €390,600.

Ireland and Spain, the two other countries in the eurozone that have suffered disproportionally in the economic downturn, have seen the cost of insuring their debt rise by four and five basis points respectively.

Greece, which is facing industrial turmoil, suffered a further blow when rating agency Moody's said it may reduce its A2 grade on Greek debt in a few months. As a result the Greek government's ability to raise funds in the eurozone could be severely affected.

If other major credit rating companies follow suit, Greek government bonds may no longer be eligible as collateral for bank borrowings from the ECB.

Moody's noted that a cut was conditional on the efforts of the Greek government.

"We have to let the government implement its plans. You can't expect a government to be able to turn around public finances in a few days," Pierre Cailleteau, managing director of sovereign risk at Moody's, said. The ratings firm Standard & Poor's, which has a lower rating on Greece, said earlier that it may cut that BBB+ rating "one or two notches" by the end of March.

"The rating could be pressured by lower profitability at the country's banks or a decline in public support for the budget plan," it said.

A close eye will be kept on the activities of investment banks which may bet on Greece defaulting on their debt, which would plunge the Mediterranean country into further trouble.

US Federal Reserve chairman Ben Bernanke said the Fed was looking into the use by investment bank Goldman Sachs and other Wall Street firms of financial instruments, such as credit default swaps, to speculate that Greece will default on its debt.

"Obviously, using these instruments in a way that intentionally destabilises a company or a country is counterproductive," Mr Bernanke said.