Thursday, 12 May 2011

Ireland set to tap €80bn loan as it opens door to IMF mission

Mr Honohan became the first Irish official to publicly say that the country will need aid to rescue its battered banks, as a squad of inspectors from the EU and the International Monetary Fund descended in Dublin on Thursday to go through the books and prepare the way for a likely rescue of at least €80bn (£68bn).

“It will be a large loan because the purpose of the amount to be made available or to be advanced is to show Ireland has sufficient firepower to deal with any concerns of the market. We’re talking about a substantial loan," Mr Honohan told state broadcaster RTE.

“It is my expectation that will happen, absolutely," he said, although he added that a final decision had not been reached.

The yield on the Irish 10-year bond fell seven basis points to 7.55pc after his comments, but remains at crippling levels.

Olli Rehn, Europe's economics commissioner, said on Wednesday that Ireland is not strong enough to back-stop a banking system that has been shut out of capital markets and suffered a haemorrhage of bank deposits. "The Irish banking sector has to be made viable and sustainable," he said.

Chancellor George Osborne said the UK stands ready to play its full part in any rescue. "Ireland is our closest neighbour and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," he said in Brussels.

Brian Cowen, the Irish premier, tried to put the best face on the humiliation, insisting that the Irish state is fully-funded until June and does not need a bail-out. "What we're involved in here is working with colleagues in respect of currency problems and euro issue problems that are affecting Ireland," he said.

Enda Kenny, Fine Gael opposition leader, ridiculed the claim, accusing him of raising the "white flag" and subjecting the country to the "dictates" of foreign masters.

Officials from the European Central Bank, the Commission, and the IMF will take part in the "Troika" mission, which Dublin called a "consultation". French finance minister Christine Lagarde said a package may be agreed within days.

Dublin hopes to dress up any bail-out as aid for banks rather than the state, but the distinction became meaningless when Ireland guaranteed its banks in September 2008.

"The two are inextricably merged: it's an omelette that is impossible to unscramble," said Professor Brian Lucey from Trinity College Dublin. He estimates the total cost of rescuing Anglo Irish and absorbing toxic debt through the 'bad bank' NAMA at €85bn.

Analysts say the state may have to inject up to €15bn into Bank of Ireland and Allied Irish (AIB) after the pair lost almost €20bn of deposits in the early autumn. Central bank governor Patrick Honohan gave a hint of ECB intentions by saying lenders should be "over-capitalised". The ECB wants to extricate itself from the role of propping up the Irish banking system - and therefore the state - with loans equal to 80pc of Irish GDP.

Any bail-out will be on softer terms than the "Memorandum" imposed on Greece. The country has already slashed spending and cut public wages by 13pc. Brussels is clearly pushing Ireland into a rescue before it needs one in order to stem contagion to Portugal and Spain, so Dublin can hope to extract guarantees on Irish sovereignty and its 12.5pc corporation tax rate, which that has been crucial in luring Google, Microsoft, Pfizer, and others to Ireland.

LCH Clearnet doubled its margin requirement to 30pc for Irish bonds despite the likely rescue.

Julian Callow from Barclays Capital said Ireland faces a "truly daunting task" trying to tackle both its financial and fiscal crises at the same time. "The country still has the highest budget deficit in the eurozone despite austerity cuts. The deficit is 12pc of GDP this year after stripping out bank rescue costs, the same as last year. This is what concerns investors," he said.


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