Ireland pledged yesterday to work with an EU-IMF mission on steps to help a stricken banking sector, a process that could lead to a bailout, which Dublin has so far baulked at asking for.
Euro zone finance ministers agreed late on Tuesday that a team from the European Commission, the IMF and the European Central Bank (ECB) team would start today to examine what measures were needed, if Dublin ultimately decides to seek aid.
“What’s here now, is a common determination that we work on these difficulties ... that work is well underway,” Irish Finance Minister Brian Lenihan said.
Lenihan told state Irish broadcaster RTE that euro zone peers had welcomed his four-year, 15 billion euros (US$23 billion) budget-cutting strategy which he hopes to publish next week.
“Our budgetary policy has full confidence among European partners. But in relation to banking, steps taken to date require further support,” he said. “What may be required may not in fact be an actual transfer of money now but demonstration of how much money can be made available if further difficulties materialize.”
In an early indication that financial markets were unimpressed by Ireland’s decision to reject immediate EU financial assistance, the premium investors charge for holding Irish 10-year bonds rather than benchmark German Bunds stayed sky-high at around 570 basis points.
LCH.Clearnet, a clearinghouse for sovereign debt, doubled its margin requirement on Irish bonds to 30 percent of net positions, an indication of the increased risk of default.
The cost of insuring against default by Ireland jumped, five-year credit default swaps widening by 25 basis points on the day to 545 bps, while those for Spain and Portugal also rose — a sign of the contagion that EU policymakers fear most.
Britain, whose banks have about US$150 billion of exposure to Irish debt, said it stood ready to help.
“We’re going to do what is in Britain’s national interest,” British Chancellor of the Exchequer George Osborne told reporters ahead of an EU finance ministers meeting in Brussels. “Ireland is our closest neighbor and it’s in Britain’s national interest that the Irish economy is successful and we have a stable banking system.”
While Ireland made no request for immediate EU rescue, resisting pressure to follow in Greece’s footsteps, economists said a state bailout remained a probability even though its public borrowing needs are funded until the middle of next year.
“There is an air of inevitability that there will be some sort of bailout,” said Alan McQuaid, chief economist at Bloxham Stockbrokers. “Why come to Dublin if you are not going to give a bailout?”
The Irish government hopes to avoid a humiliating rescue that could further weaken its grip on power but has left the door open to aid for its banks, which were driven to the brink by the global financial crisis and a property market crash.
The action by the euro zone finance ministers echoed a decision to send an EU-IMF-ECB team to Greece as part of Athens’ eventual 110 billion euro rescue.
Euro zone sources said there was an agreement in principle to trigger aid for Ireland when the joint mission completes its consultations — perhaps in days — and the aid would not be just a program for the banks.
“We are closer to a question of days rather than six months,” French Economy Minister Christine Lagarde said.
The stakes are high even though other European officials played down a suggestion by European Council President Herman Van Rompuy that the EU’s future could be at stake.
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