Tags: Eurozone | Irish | Debt | Crisis

Eurozone Seeks Way Out of Irish Debt Crisis

Tuesday, 16 Nov 2010 07:37 AM

 

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Eurozone finance ministers will try to find a way out of Ireland's debt crisis on Tuesday evening, with Dublin resisting calls to seek a state bailout by contending that only its banks may need help.

Dublin is under pressure from the European Central Bank and eurozone peers to take a quick decision on applying for aid amid signs that market contagion is spreading to fellow struggler Portugal and could suck in bigger states.

The Irish government, trying to protect a slim parliamentary majority, says it is talking to European partners about how to provide stability for its banks but denies that a state rescue is needed to stop its problems spilling into other countries.

"I would hope after the Ecofin meeting this afternoon and tomorrow there would be more logic introduced into this," Ireland's European affairs minister, Dick Roche, told BBC Radio.

"There is no reason why we should trigger an IMF or an EU-type bailout."

Luxembourg Prime Minister Jean Claude-Juncker, who chairs Tuesday's talks in Brussels, said Ireland was not even close to asking for a Greek-style bailout, which would involve tough austerity terms enforced by the European Commission and the IMF.

But the Irish opposition said moves were already under way.

Bank of Spain Governor Miguel Angel Fernandez Ordonez urged Dublin on Monday to do more to calm financial markets, telling reporters: "It's not up to me to make a decision on Ireland, it's Ireland that should take the decision at the right moment."

Ireland's public borrowing needs are funded until mid-2011, but its bond yields have soared in the past week and its state-guaranteed banks are largely shut out of inter-bank lending and reliant on the ECB for funds.

This has helped push up the borrowing costs of other countries on the 16-country eurozone's periphery, such as Spain and Portugal.

The Irish coalition government has been reluctant to apply for assistance, partly because it faces a by-election it can ill afford to lose on Nov. 25 and also because it says it wants to preserve its sovereignty.

Dublin has hinted it may ask for funding to support its banks, which were driven into debt by the global financial crisis and a property market crash, rather than requesting a politically embarrassing state bailout.

"The cost of money as expressed in the bond market has been very high although it eased today. We have to discuss these matters with partners ... how best to underpin financial and banking stability within the euro area," Prime Minister Brian Cowen told the national broadcaster RTE on Monday.

If such high borrowing costs became the norm, it would be hard for banks "to function as engines of recovery," he said.

Spillover

Bond markets held their breath on Tuesday, awaiting the eurozone finance ministers' meeting — it promises to be heated with Spain and Portugal already pressing for some sort of action.

"The market thinks there is going to be some sort of deal and it's just a matter of time before it's announced," one London trader said.

He said the Irish/German 10-year bond yield spread would tighten sharply if a deal was announced, but markets would then turn their attention to other debt-laden states like Portugal.

Finnish Finance Minister Jyrki Katainen told newspaper Ilta-Sanomat that Ireland's situation was "very unstable," adding: "Ireland has not asked for help and is trying to manage on its own. I hope they will manage."

Economists say Cowen's government may be able to wait until after the by-election to request help but Irish opposition finance spokesman, Michael Noonan, said the BBC he believed "European intervention (was) under way."

Portuguese Finance Minister Fernando Teixeira dos Santos told the Financial Times on Monday there was a high risk that his country would have to seek international aid because markets were lumping Greece, Ireland and Portugal together.

But he later told Reuters there were no plans for Lisbon to request emergency foreign funding.

At their monthly meeting, the eurozone finance ministers are likely to praise Ireland's planned 2011 budget cuts, which face a parliamentary vote of approval next month.

They are joined for talks on Wednesday by the other EU finance ministers.

They are also expected to discuss the future eurozone crisis resolution mechanism, which Germany wants to start from 2013, replacing the 440-billion-euro European Financial Stability Facility set up after Greece sought help in May.

EU sources say possible aid under discussion for Ireland ranges from 45 billion to 90 billion euros ($63-123 billion), depending on whether Dublin needs support for its banks.

Ireland and Greece says Germany has aggravated problems by pushing the idea of asset value reductions or "haircuts" for private bondholders under the planned permanent rescue mechanism, raising the specter of potential defaults.

"Unless the EU changes track and agrees to make the EFSF (rescue fund) permanent and the ECB steps up its purchases of the hard-hit countries' government bonds, investors will believe that default is inevitable and demand correspondingly punitive interest rates," said Simon Tilford, chief economist at the London-based Centre for European Reform.

"Contagion to other member-states will be all but inevitable. If, and when, it reaches Spain, the crisis risks spiraling out of control," he said.

© 2014 Thomson/Reuters. All rights reserved.

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