Pressure mounted further on Dublin as one of Europe's biggest clearing houses increased charges for trading Irish bonds because of the jump in the country's cost of borrowing. It is the third such increase in as many weeks.
LCH.Clearnet on Thursday increased the charges or margins from 30 percent to 45 percent above normal requirements to trade Irish bonds in a move that will make Ireland's banks, which use sovereign bonds to raise money for funding, even more dependent on the European Central Bank.
The decision follows the relentless rise in Irish bond yields, which make the country more risky in the eyes of investors and market participants. It means banks in Dublin, which are big holders of Irish debt, will have to pay higher fees to use these bonds as collateral in exchange for cash, which is vital to meeting funding requirements.
Irish 10-year bond yields fluctuated near euro-era highs on Thursday at 8.7 percent.
The euro dipped towards two-month lows, falling for the fourth day in a row to trade at $1.3295, after touching $1.3284, its lowest since September 22, on Wednesday.
LCH.Clearnet is used by banks and financial institutions in so-called repurchase transactions, where bonds are exchanged for cash, as it shares the burden in a potential bond default and allows banks to reduce their counterparty risk.
Without LCH.Clearnet backing a deal, many institutions would simply refuse to trade Irish bonds because of the deep concerns over Dublin's economy.
The Irish banks are likely to increase their reliance on the ECB, which charges much lower margins. The ECB lent €130 billion ($173 billion) to Irish banks in October, a 60 per cent increase since March when they borrowed €82.5 billion ($109 billion)
LCH.Clearnet first raised additional charges for margin requirements to 15 percent earlier this month. Last week, it increased them further to an additional 30 percent.
The clearing house looks at yield spreads between Germany, Europe's benchmark bond market, and other eurozone countries when making its decisions on margin requirements. Ireland's cost of borrowing over Germany has widened sharply in recent weeks and days, prompting the move by the clearing house.
Analysts at Commerzbank said the euro's weakness against the dollar was a "justified depreciation" and reflected doubts in financial markets about the joint European Union and International Monetary Fund rescue package for Ireland.
"A glance at the euro-dollar exchange rate is enough to realize that the foreign exchange markets do not consider the bail-out of Ireland to be a success," they said. "Rising spreads in Portugal, Spain and Greece prove the markets have their doubts."
The Dublin government sought to regain the initiative on Wednesday with the publication of a four-year plan to save its debt-laden economy.
The 140-page national recovery plan, which is likely to form an agreement with the EU and IMF on the bail-out, was published ahead of Thursday's critical by-election in Donegal South West, which could see the coalition government's paper-thin parliamentary majority further reduced.