Irish Prime Minister Brian Cowen, left, and European commissioner for economic and financial affairs Olli Rehn meet at Government Buildings, in Dublin yesterday. (Photo: AP)

DUBLIN, Ireland

A top European Union official told Ireland it shouldn’t require a bailout if it makes smart plans for financial survival — even as investors kept dumping Irish bonds in expectation that an EU rescue package is inevitable.

The economic and monetary affairs commissioner, Olli Rehn, told a reverentially silent crowd of politicians, business figures and economists in Dublin yesterday that the EU would help guide Ireland back from its debt crisis and the continent’s worst deficit.

“You are smart and stubborn people. Time and again you have proved you can overcome adversity. And this time you do not face the challenges alone. Europe stands by you,” Rehn said at the end of a two-day fact-finding visit to test how much austerity — in the form of spending cuts and tax increases — Ireland can tolerate.

Rehn endorsed Ireland’s ambitious plan to slash euro6 billion (US$8.5 billion) from its 2011 deficit in a budget that will go to lawmakers in December. Beyond that, Ireland hopes to prune euro9 billion more in coming years to get Ireland’s deficit — currently running at a modern European record of 32 per cent of GDP — back to the euro zone’s limit of three per cent by 2014.

Rehn said he believed Ireland was right to aim for this target and could achieve it through its own sacrifices. He stressed the need for all factions of political and business life to rally behind the goal.

But after he met opposition chiefs and labor-union leaders, both stressed they would keep opposing the government’s plans. The two major opposition parties said they would vote against any budget in hopes of toppling the deeply unpopular Prime Minister Brian Cowen, who has a dwindling majority in parliament.

And delegates from the Irish Congress of Trade Unions — which represents 700,000 workers in this country of 4.5 million and plans a day of protest later this month — said the cuts being sought would hurl Ireland back into recession and prove self-defeating, because tax collections would fall.

Paul Sweeney, the union umbrella’s chief economist, said the government was planning “saturation bombing” of the economy.

“There won’t be green shoots for years,” Sweeney said. “After 6 billion euros more in cuts next year, I’m sorry to say it, but things are going to be far worse.”

Investors continued to sell off Ireland’s treasuries in favor of safer-bet debt elsewhere, particularly in German bunds. The interest rate, or yield, on Ireland’s 10-year treasuries reached a new euro-zone high of 7.94 per cent in the minutes following Rehn’s speech.

Analysts agree that Ireland is running short of time to get its debt crisis under control before it’s left with no option but to seek an emergency loan from the European Financial Stability Facility, a euro750 billion (US$1.05 trillion) backstop created by the 16 nations of the euro zone in May as they bailed out Greece.

Ireland stockpiled funds over the summer and has stopped trying to borrow money on the bond market since September, citing the punitively high rates of interest demanded by buyers, but those rates have risen even higher in recent weeks as investors bet on Ireland’s failure to keep funding its debts.

Finance Minister Brian Lenihan says Ireland has enough money to pay its bills through April. He hopes the bond yields being demanded will fall substantially before Ireland’s treasury officials return to the market in January or February.

If not, economists say Ireland will face a dilemma whether to pay over-the-odds rates on the market or turn to the EU fund. They say a bailout will be economically attractive only if bond yields keep rising towards Greek levels, currently over 11 per cent.

“The cost of our borrowing has risen above Argentinian levels. So we are in a hole … but we have room to get out of it with a little luck,” said John McHale, economics professor at the National University of Ireland at Galway.

McHale said Ireland should tap an EU loan only if foreign banks and governments continue dumping Irish bonds, driving up the yields required to tempt new buyers. But he said the EU option wouldn’t be a cheap option, with estimates of the likely interest rate it would charge ranging from six per cent to eight per cent.

“The interest rate would be high. We would have to do at least as much adjustment anyway,” said McHale, referring to Ireland’s plans to slash euro15 billion from its deficits over the next four years. “And there would be huge reputational damage done to Ireland. So, we might as well solve this problem ourselves.”