Market tension eases on Ireland following asking for EU help
Pressure eased slightly on Ireland early Monday ahead of meetings in Brussels this week to consider whether a bailout is needed to prevent market turbulence from spreading to other European countries.
The Irish government continued to insist that it did not need financial aid, arguing that it could present a credible austerity budget next month that would satisfy investors, and that it had enough money to finance its operations through spring of next year.
In a statement late Sunday, the Finance Ministry reiterated that “ongoing contacts continue at official level with international colleagues in light of current market conditions,” but stressed that “Ireland has made no application for external support.”
Similarly, Christine Lagarde, the French finance minister, told French radio early Monday that “there is no request for aid” from Ireland.
But analysts and investors, as well as some European officials, say the government’s plan needs to be buttressed by a promise of outside funding to counter the jumpiness in the markets, which had pushed interest rates on Irish bonds to record highs last week before they fell back dramatically on Friday.
Officials had said they were preparing a contingency plan in case the markets moved sharply against the country on Monday. But in early trading, the spread of Irish 10-year bonds over their German equivalents, the European benchmark, narrowed by 3 basis points, to 5.39 percentage points. Yields strengthened to 8.1 percent — after peaking last week at 9 percent — on news of possible aid from Europe.
The Irish situation was expected to top the agenda at the regular monthly meeting of European finance ministers on Tuesday and Wednesday.
The Irish Independent newspaper reported Monday that Finance Minister Brian Lenihan was considering asking if money from the E.U. emergency fund could go directly to troubled Irish banks rather than state coffers. That could allow the government to save face and maintain control of the economy, it said.
The newspaper did not cite any sources; the Irish finance ministry declined to comment specifically on the report.
The push to shore up Irish finances reflects the desire of some officials to get ahead of a problem that could not only undermine Dublin’s recovery efforts but also threaten other weak economies in Europe like Portugal and Spain. Last spring, when Greece teetered on the brink of default, a series of reassurances by the European Union failed to calm investor anxiety, and a huge bailout fund had to be arranged at the last minute to stabilize Greece and relieve pressure on the euro.
On Friday, the storm in the markets was briefly calmed when five European ministers at the Group of 20 summit in Seoul issued a supportive statement and Ireland’s finance minister, Brian Lenihan, reaffirmed the country’s resolve. But European officials are concerned that more needs to be done before Ireland presents its next budget, scheduled for Dec. 7.
Preliminary talks on a rescue package had already taken place. Discussions involving European Union ministers and senior officials continued on Sunday, said one official involved in the debate.
According to a report by Barclays Capital, the European Union and the International Monetary Fund would need to loan €80 billion to €85 billion, or $109 billion to $116 billion, to satisfy Ireland’s sovereign funding needs and to create an added buffer to help recapitalize its failed banks.
The “extreme tension that has been prevailing in the financial markets, especially concerning the ability of Ireland to achieve a sustainable fiscal path by going it alone,” meant that recourse to European Union loans “would, in our view, represent a sensible outturn,” Julian Callow and Antonio Garcia Pascual of Barclays Capital wrote in a research note on Friday evening.
Any Irish bailout would be a delicate matter for Germany, which strongly resisted the bailout of Greece and has been pushing to overhaul the current mechanism for European rescues to ensure that private investors help foot the bill of any sovereign defaults. German officials, however, may be hoping that Ireland accepts the bailout sooner rather than later to soothe jittery debt markets and ensure stability of the euro and, in the longer term, the growth prospects of the European Union.
The first of any such payments to Ireland would come from a pot of money totaling €60 billion that is guaranteed by the union’s budget and set up to provide rapid assistance, one European official said. The official spoke on the condition of anonymity because the discussions were in progress and could change. The official would not speculate on how much money Ireland might need over all.
Any additional loans would have to come from a much larger pool of money guaranteed by the euro-zone nations, totaling €440 billion. Reaching such an agreement on using those funds might prove harder, as governments still are debating how a permanent loan system should work. It also could take up to four weeks to draw up a support program using that pool and could require more scrutiny from the International Monetary Fund.
The two pools of funding were set up in May after the bailout of Greece. But the official stressed that Ireland was very different.
Whereas Greece’s rescue came after years of concealing the true state of its finances, Ireland has a much stronger track record in economic management. That means it was still possible that Ireland could steady the markets by imposing tough austerity measures.
While Ireland must submit its budget by Dec. 7, it is rushing to prepare a four-year plan that will show how it plans to cut its current deficit from 32 percent of gross domestic product to 3 percent by 2014.
That strategy will include another round of spending cuts and is likely to spark further unrest from a citizenry that is suffering from a third consecutive year of negative growth in the economy.
The Irish government is extremely reluctant to seek a bailout, analysts say, because of the stigma associated with aid and the risk to its political standing.
The Fianna Fail Party leads a shaky coalition that holds only a thin majority in Parliament and could be forced to call early elections next year.
Dublin is also hoping to reassure markets that it can avoid a bailout by winning approval from the European Union for its bailout of Anglo Irish Bank.
The European Commission, the executive arm of the union, still needs to determine whether the bank bailout falls within European state aid rules. The commission is considering whether to approve a 6.4 billion euro portion of the bailout of Allied Irish and to agree to the overall restructuring plan.
Source: The New York Times