A closely-watched meeting of euro-area finance ministers failed to resolve the debt crisis that is sweeping over Ireland. No bailout was announced, not even a clue of what lies ahead. Instead, markets are left to speculate about the future course of events, with potential contagion impacting Portugal and Spain the next big concern.

Ireland 10-Year Government Bond Yield Spread versus German Bund:

Euro_Under_Pressure_as_Ireland_Bides_Time_Contagion_Threatens_Rest_of_Eurozone_body_Picture_6.png, Euro Under Pressure as Ireland Bides Time, Contagion Threatens Rest of Eurozone

Ahead of the eurogroup meeting, Irish Finance Minister Brian Lenihan remarked that “market developments have not been good to Ireland,” but echoing what Prime Minister Brian Cowen said earlier, he continued, “Ireland is fully funded until the middle of next year.”

Later Jean-Claude Juncker of Luxembourg, the head of the eurogroup, said that the Irish government is “free to make a request [for aid]…it will be up to them.” He added, “We can’t force them to request something they don’t want. The Irish government in the coming days has to make a definite decision on this.”

So what is Ireland waiting for? The hope of the Irish government is that the situation calms down and that yields will be lower by the time it has to go to the debt markets to borrow money. The government is expected to release a four-year plan to cut the deficit—which is expected to be a record 32-percent of GDP this year—sometime next week. There is speculation that the government will also publish the 2011 budget ahead of the scheduled date of December 7th.

Clearly, the Irish government would like to manage this crisis on its own if possible, but pressure is mounting from both other EU members, as well as markets, for Ireland to take the bailout. The number one concern of fellow members is the risk of contagion. The weak fiscal situations in Portugal and Spain leave the countries susceptible to punishment by markets. Indeed, we have seen yields on government debt in both nations spike substantially as traders anticipate “the next shoe to drop.”

Moreover, while Ireland may be “fully funded” until mid-2011 as the government claims, the country’s distressed banking sector is another story. Dependent on the liquidity provided by the European Central Bank, Irish banks have been the destination of one-fifth of total ECB lending to European banks, or 90 billion euros in October. Additionally, as the Irish government has essentially guaranteed the deposits and debt of much of the country’s banking sector, it is responsible for any additional losses that occur. The government has already plowed in 40 billion euros to prop up the banking sector.

Portugal 10-Year Government Bond Yield Spread versus German Bund:

Euro_Under_Pressure_as_Ireland_Bides_Time_Contagion_Threatens_Rest_of_Eurozone_body_Picture_5.png, Euro Under Pressure as Ireland Bides Time, Contagion Threatens Rest of Eurozone

In response to these circumstances, we have seen intense pressure on the Euro currency and this may continue until there is a resolution of the situation in Ireland. But even if Ireland accepts a bailout, markets must then confront the sovereign concerns of Portugal and Spain, as well as renewed concerns regarding Greece. Recall that all these sovereign debt issues in Europe began with Greece earlier this year before a bailout from the International Monetary Fund and the European Union finally quelled some of the worst fears of potential default.

Now we see that Austria is having some qualms about continuing to support Greece. Austrian Finance Minister Josef Proll said that “statistics give no reason to hand over the money from an Austrian point of view,” suggesting that Greece has not done enough to abide by the terms of the bailout agreement. If Austria abandons the bailout of Greece, it calls into question the integrity of the entire 750 billion euro financial stability facility.

Greece 10-Year Government Bond Yield Spread versus German Bund:

Euro_Under_Pressure_as_Ireland_Bides_Time_Contagion_Threatens_Rest_of_Eurozone_body_Picture_4.png, Euro Under Pressure as Ireland Bides Time, Contagion Threatens Rest of Eurozone

EUR/USD intraday chart (15-minute):

Euro_Under_Pressure_as_Ireland_Bides_Time_Contagion_Threatens_Rest_of_Eurozone_body_Picture_3.png, Euro Under Pressure as Ireland Bides Time, Contagion Threatens Rest of Eurozone