Tags: Ireland | Bank | Talks | Prelude | Possible | Aid

EU, IMF to Probe Irish Banks for Possible Bailout

Wednesday, 17 Nov 2010 12:28 AM

 

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Ireland pledged on Wednesday to work with a European Union-IMF mission on steps to help a stricken banking sector, a process which could lead to a bailout which Dublin has so far baulked at asking for.

Euro zone finance ministers agreed late on Tuesday that a team from the European Commission, the International Monetary Fund and the European Central Bank team would start on Thursday to examine what measures were needed, if Dublin ultimately decides to seek aid.

"What's here now, is a common determination that we work on these difficulties ... that work is well underway," Irish Finance Minister Brian Lenihan said.

Lenihan told state Irish broadcaster RTE that euro zone peers had welcomed his four-year, 15 billion euros ($20.22 billion) budget-cutting strategy which he hopes to publish next week.

"Our budgetary policy has full confidence among European partners. But in relation to banking, steps taken to date require further support," he said.

"What may be required may not in fact be an actual transfer of money now but demonstration of how much money can be made available if further difficulties materialize."

In an early indication that financial markets were unimpressed by Ireland's decision to reject immediate EU financial assistance, the premium investors charge for holding Irish 10-year bonds rather than benchmark German Bunds stayed sky-high at around 570 basis points.

LCH.Clearnet, a clearing house for sovereign debt, doubled its margin requirement on Irish bonds to 30 percent of net positions, an indication of the increased risk of default.

The cost of insuring against default by Ireland jumped, five-year credit default swaps widening by 25 basis points on the day to 545 bps, while those for Spain and Portugal also rose — a sign of the contagion that EU policymakers fear most.

Britain, whose banks have around $150 billion of exposure to Irish debt, said it stood ready to help.

"We're going to do what is in Britain's national interest," Chancellor of the Exchequer George Osborne told reporters ahead of an EU finance ministers meeting in Brussels.

"Ireland is our closest neighbor and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system."

While Ireland made no request for immediate EU rescue, resisting pressure to follow in Greece's footsteps, economists said a state bailout remained a probability even though its public borrowing needs are funded until mid-2011.

"There is an air of inevitability that there will be some sort of bailout," said Alan McQuaid, chief economist at Bloxham Stockbrokers.

"Why come to Dublin if you are not going to give a bailout?" EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros if it asks for help.

The Irish government hopes to avoid a humiliating rescue that could further weaken its grip on power but has left the door open to aid for its banks, which were driven to the brink by the global financial crisis and a property market crash.

The action by the euro zone finance ministers echoed a decision to send an EU-IMF-ECB team to Greece earlier this year as part of Athens' eventual 110 billion euro rescue.

Euro zone sources said there was an agreement in principle to trigger aid for Ireland when the joint mission completes its consultations — perhaps in days — and the aid would not be just a program for the banks.

French Economy Minister Christine Lagarde said: "We are closer to a question of days rather than six months."

High Stakes

The stakes are high even though other European officials played down a suggestion by European Council President Herman Van Rompuy, who heads the body that groups the EU's 27 national governments, that the EU's future could be at stake.

German Chancellor Angela Merkel said she did not believe the euro zone was in danger.

"But we are experiencing turmoil and situations of the kind I wouldn't have dreamed of a year and a half ago," she told ARD television.

Concern that Ireland's crisis could spread to other weak economies in the 16-country euro area has unsettled financial markets and pushed up borrowing costs.

"You have to think the market is going to go after all of the periphery, trying to force them into a bailout, which should support Bunds," a bond trader in London said.

Lenihan dismissed suggestions, most notably from German lawmakers, that Ireland should raise its ultra-low 12.5 percent corporation tax rate, a magnet for foreign investment, to help cut its debt.

Higher-tax countries have long seen the Irish rate as a form of unfair competition.

"Of course our corporate tax rate is safe," he said.

Bank of Ireland, the country's largest lender, signaled last week it had suffered a 10 billion euro outflow of deposits from early August until the end of September.

Allied Irish Banks, which will be more than 90 percent owned by the state following a rights issue later this year, will issue a trading statement later this week with details about its funding situation.

© 2014 Thomson/Reuters. All rights reserved.

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