Ireland in rescue talks as UK offers support
Wednesday, November 17, 2010
BRUSSELS (AP) — As EU and Irish officials sought a way out of the country’s debt storm, Britain on Wednesday offered support on top of any that might come from the 16-country eurozone.
Britain, not part of the eurozone, “stands ready to support Ireland” in whatever the debt-stricken country needs to do to stabilize its troubled banking system, Finance Minister George Osborne said.
“It is in Britain’s national interest that the Irish economy is successful and we have a stable banking system,” said Osborne, a day after the eurozone finance ministers failed to convince Ireland to accept a Greek-style bailout.
Irish and EU officials vowed Tuesday night to stabilize the banks at the center of Ireland’s financial crisis and keep it from spreading to other fragile euro-linked economies. Representatives of the EU, the European Central Bank and the International Monetary Fund will travel to Ireland this week to determine what to do about the banks.
Ireland has taken over three banks and is expected to take over more in a bailout that has already reached 45 billion ($61 billion) and likely will push the nation’s 2010 deficit to a staggering 32 percent of GDP. The government in Dublin insists that it doesn’t need a bailout from Europe, but growing doubts about Ireland’s ability to pay its bills have sent interest rates soaring on Irish bonds.
“It is natural (that the U.K. would be interested in helping to stabilize Ireland), because the United Kingdom and U.K. banks have a very, very significant exposure in Ireland,” said the EU’s monetary affairs chief Olli Rehn. “There is a very strong interconnection in the banking sector and the financial system between the two countries.”
Investors, disappointed that EU governments have yet to strike a bailout deal with Ireland, responded Wednesday by selling the treasuries of the eurozone’s most debt-threatened nations — Greece, Ireland, Spain, Portugal and Italy — in favor of the safest haven, Germany.
In opening trade, yields on Irish 10-year bonds rose to 8.25 percent. Equivalent bonds from Greece reached 11.66 percent, Portugal 6.81 percent, Spain 4.63 percent and Italy 4.24 percent. The interest rate on 10-year German bunds dipped to 2.59 percent. Bonds being dumped see their interest rates rise, while those in demand pay out less.
“Ireland is now engaging in an intensive, and disclosed, engagement in relation to the problems in the banking sector,” said Irish Finance Minister Brian Lenihan said Tuesday night. “We will take whatever decisive measures that are required to stabilize our banking system as part of the stability of the wider eurozone.”
A 750 billion ($1 trillion) backstop, funded by eurozone countries and the IMF stands ready to help nations that run out of money, EU officials have emphasized.
The IMF said late Tuesday that it would work with Irish and European officials, starting Thursday, to find “the best way to provide any necessary support to address market risks.”
Concerns that Ireland will be unable to pay the cost of rescuing its banks — which ran into trouble when the country’s real estate boom collapsed — have worsened Europe’s government debt crisis. Markets have pushed up borrowing costs for other vulnerable nations and threatened to destabilize the common euro currency.
The priority for European leaders is containing contagion — a market panic that jumps from one weak country to the next.
Behind Ireland stands Portugal, one of the eurozone’s smaller members with 1.8 percent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big — 11.7 percent of eurozone output — that it could present a much larger challenge if it needs help.
Governments struggling with debt — built up during the recession and in some cases over years of living beyond their means — have slashed spending and raised taxes. But such austerity measures threaten to undermine desperately needed economic growth, in turn making it harder for nations to repay their debts.
The Irish government protests it doesn’t need aid, at least not yet, because it has sufficient funds through mid-2011 and is planning 6 billion ($8 billion) in 2011 cuts and tax hikes. However, it has suggested that direct EU aid to its cash-strapped banks would boost Ireland’s creditworthiness, since the government has guaranteed the banks’ financial obligations.
An Irish bailout would mean humiliation for the government ahead of possible national elections early next year. Ireland would lose some control over its finances in return for loans, which could mean being forced to give up the country’s rock-bottom corporate tax rate — a key attraction to businesses that annoys other EU countries that have much higher rates.
The low tax rate helped Ireland become one of Europe’s fastest growing economies over the past decade, transforming it from a resident of Europe’s poorhouse into a “Celtic tiger.”
But when the boom collapsed in amid the financial crisis of 2008, Dublin was forced to rescue its banks, which had grown massively in recent years.
The government has taken over three banks — Anglo Irish, Irish Nationwide and the Educational Building Society — and has taken major stakes in Allied Irish Banks and Bank of Ireland. Allied Irish is expected to fall under majority state control within weeks.
The current panic over Ireland began in the wake of revelations that the cost of Ireland’s bank bailout had risen sharply. The pressure worsened after Germany said bond holders should absorb part of the losses in any future bailouts. EU leaders slowed a bond sell-off with a statements that existing debt holdings wouldn’t be affected, but couldn’t restore calm.
Ireland says it has sufficient cash to fund government services through June 2011, and has postponed returning to the bond market until early 2011 in hopes that the interest rate demanded by investors will have fallen by then.
Should Ireland request aid after all, it wouldn’t take long to raise the necessary money, said Klaus Regling, who runs the European Financial Stability Facility, the eurozone’s portion of the 750 billion financial backstop. It would issue bonds backed by eurozone governments.
“If one of our shareholders requests financial support, then the EFSF would be able to go to the markets very quickly,” Regling said. After that, it would take five to eight working days to raise the money, he added.
Associated Press Writer Shawn Pogatchnik contributed from Dublin.