Ireland swallows bitter pill, asks EU for loan
Monday, November 22, 2010
DUBLIN (AP) — Debt-crippled Ireland has formally applied for a massive EU-IMF loan to stem the flight of capital from its banks, joining Greece in a step unthinkable only a few years ago when Ireland was a booming Celtic Tiger and the economic envy of Europe.
European Union finance ministers quickly agreed in principle to the bailout, saying it “is warranted to safeguard financial stability in the EU and euro area.” But all sides said Sunday that further weeks of negotiations loomed to define the fund’s terms, conditions and precise size.
The agreement gave a boost to the markets, with the Financial Times-Stock Exchange 100-share index up 0.7 percent in early trading Monday morning. Asian stock markets were mostly higher: Japan’s Nikkei stock index was up 1.1 percent, South Korea’s Kospi rose less than 0.1 percent and China’s Shanghai Composite Index advanced 0.2 percent, but Hong Kong’s Hang Seng index was down 0.4 percent.
Ireland’s crisis, set off by its foundering banks, drove up borrowing costs not only for Ireland but for other weak links in the eurozone such as Spain and Portugal. Ireland’s agreement takes some pressure off those countries, but they still may end up needing bailouts of their own.
The European Central Bank — which oversees monetary policy for the 16-nation eurozone and first raised alarm bells about a renewed cash crisis in Dublin banks — said the aid would “contribute to ensuring the stability of the Irish banking system.” Sweden and Britain, not members of the euro currency, said they also were willing to provide bilateral loans to Ireland.
Irish Finance Minister Brian Lenihan spent much of Sunday talking to other eurozone financial chiefs about conditions they would place on the emergency aid package taking shape.
Lenihan said Ireland needed less than 100 billion ($140 billion) to use as a credit line for its state-backed banks, which are losing deposits and struggling to borrow funds on open markets. He said the loan facility could last anywhere from three to nine years.
International Monetary Fund director Dominique Strauss-Kahn said his organization “stands ready to join this effort, including through a multiyear loan.” He said IMF experts already in Dublin would “hold swift discussions on an economic program with the Irish authorities, the European Commission, and the European Central Bank.”
Ireland has been brought to the brink of bankruptcy by its fateful 2008 decision to insure its banks against all losses — a bill that is swelling beyond 50 billion ($69 billion) and driving Ireland’s deficit into uncharted territory.
The country had long resisted a bailout, but Lenihan said it was now painfully clear that Ireland needed “financial firepower” immediately to complement its own cutthroat plans for recovery.
This country of 4.5 million now faces at least four more years of deep budget cuts and tax hikes totaling at least 15 billion ($20.5 billion) just to get its deficit — bloated this year to a European record of 32 percent of GDP — back to the eurozone’s limit of 3 percent by 2014.
The European Central Bank and other eurozone members had been pressing behind the scenes for Ireland — long struggling to come to grips with the true scale of its banking losses — to accept a bailout that would reassure investors the country won’t, and can’t, go bankrupt.
The economically struggling governments of Spain and Portugal, in particular, had criticized Ireland’s recent determination to keep going it alone. Ireland’s inability to stop its financial bleeding has fueled investor fears of wider eurozone defaults and driven up those countries’ borrowing costs on bond markets.
But even with Ireland seeking aid, financial analysts say Spain and Portugal remain on course for potential bailouts of their own. Spain is fighting Europe’s highest unemployment rate and Portugal is seen as doing too little to restructure an unusually uncompetitive economy.
Ireland’s move comes just six months after the EU and IMF organized a 110 billion ($150 billion) bailout of Greece and declared a 750 billion ($1.05 trillion) safety net for any other eurozone members facing the risk of imminent loan defaults. It demonstrates that creating the three-layered fund didn’t, by itself, reassure global investors that it would be safe, or smart, to keep lending to the eurozone’s weakest members.
Economists question whether the economies of Ireland, Portugal, Spain and Greece will grow sufficiently to build their tax bases and permit them to keep financing, never mind paying down, their debts. The euro, however, has shown some resiliency in the tumult so far, remaining relatively strong against the U.S. dollar.
Lenihan said Ireland most needed a “contingency” fund from which Irish banks could borrow. He said the funds would “not necessarily” be used and emphasized that the government’s own operations are fully funded through mid-2011.
The rapid pace of Sunday’s humiliating Irish U-turn surprised many analysts, given how Lenihan and Ireland’s deeply unpopular prime minister, Brian Cowen, appeared in recent days to be in denial that Ireland needed a cent of foreign aid.
More than 30 banking experts from the IMF, ECB and European Commission began arriving in Dublin only on Thursday to begin poring over the books and projections of the government, treasury and banks, a mammoth task expected to take weeks.
Ireland’s precipitous fall has been tied to the fate of its overgrown banks, which received access to mountains of cheap money once Ireland joined the eurozone in 1999. The Dublin banks bet the bulk of their borrowed funds on rampant property markets in Ireland, Britain and the United States, a strategy that paid rich dividends until 2008, when investors began to see the Irish banking system as a house of cards.
When the most reckless speculator, Anglo Irish Bank, faced bankruptcy in September 2008, it and other Irish banks persuaded Lenihan and aides that they faced only short-term cash problems, not a terminal collapse of their loan books.
Lenihan announced that Ireland would insure all deposits — and, much more critically, the banks’ massive borrowing from overseas investors — against any default, an unprecedented move.
At the time, Lenihan billed his fateful decision as “the cheapest bailout in history” and claimed it wouldn’t cost the Irish taxpayer a penny. The presumption was that confidence would return and Ireland’s lending would resume its runaway trend.
But in the two years since, Lenihan has nationalized Anglo and two other small banks and taken major stakes in the country’s two dominant banks, Allied Irish and Bank of Ireland. The flight of foreign capital began accelerating again in the summer amid renewed doubts that the government understood the full scale of its losses.
Lenihan and the Irish Central Bank responded in September by estimating the final bill at 45 billion to 50 billion ($62 billion to $69 billion). Investors, initially relieved to have a figure, quietly resumed their withdrawal from Irish banks and bond markets in mid-October, driving up the borrowing costs for Portugal and Spain, which face their own deficit and debt crises.
Over the past two months Cowen and his 15-member Cabinet have been drafting a four-year austerity plan for Ireland that is expected to be unveiled later this week.
It seeks to close the gap between Ireland’s spending, currently running at 50 billion, and depressed tax revenues of just 31 billion. It proposes the toughest steps in the 2011 budget, when 4.5 billion will be cut from spending and 1.5 billion in new taxes imposed — steps that threaten to drive Ireland’s moribund economy into recession and civil unrest.
Both Cowen and Lenihan have stressed that Ireland’s 12.5 percent rate of tax on business profits — its most powerful lure for attracting and keeping 600 U.S. companies with bases in Ireland — will not be touched no matter what happens.
France, Germany and other eurozone members have repeatedly criticized the rate as unfair and say it should be raised now given the depth of Ireland’s red ink.
However, IMF and EU leaders negotiating the bailout terms with Ireland have said they don’t intend to dictate any specific tax reforms to Ireland, only to ensure that targets for cutting spending and raising taxes overall are met. Ireland’s right to set its own tax rates also has been enshrined in a series of EU treaties, making any strong-arm tactics now unlikely.
Ireland’s 2011 budget, however, could yet be torpedoed by its own divided lawmakers.
The budget faces a difficult passage through parliament when it is unveiled Dec. 7. Cowen has an undependable three-vote majority that is expected to disappear by the spring as byelections, or special elections, are held to fill seats.
Cowen and his long-dominant Fianna Fail party are languishing at record lows in opinion polls. The latest survey published in the Sunday Business Post newspaper said Fianna Fail has just 17 percent support, whereas the two main opposition parties, Fine Gael and Labour, command 33 percent and 27 percent respectively. Those two parties are widely expected to form a center-left government after Cowen loses his majority, which would force an early election.
Reflecting the national mood, the Sunday Independent newspaper displayed the photos of Ireland’s 15 Cabinet ministers on its front page, expressed hope that the IMF would order the Irish political class to take huge cuts in positions, pay and benefits — and called for Fianna Fail’s destruction at the next election.
“Slaughter them after Christmas,” the Sunday Independent’s lead editorial urged.
Associated Press Writers Raphael G. Satter in London and Gabriele Steinhauser in Brussels contributed to this report.