Under Pressure Over Bailout, Dublin Defends Its Finances

BRUSSELS — European ministers worked over the weekend on a financial rescue plan for Ireland, as pressure mounted on Dublin to seek a bailout as the best means of preventing the markets from spreading turbulence to other European countries, officials said on Sunday.
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Aidan Crawley/Bloomberg News

Dublin is hoping to reassure markets that it can avoid a bailout by winning formal European Union approval for its bailout of Anglo Irish Banks.
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The Irish government continued to insist that it did not need a bailout, 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 early next year.

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 have pushed interest rates on Irish bonds to record highs.

“There is a risk of a self-fulfilling prophecy,” a European diplomat said, speaking on the condition of anonymity because of the sensitivity of the issue. “Even a denial is seen as some sort of affirmation that there is something to deny.”

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 supportive statements 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.

The reaction of the bond markets on Monday is the next test for Ireland. Officials said they were preparing a contingency plan in case the markets moved sharply against the country.

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. But by early Sunday evening, diplomats said, there were still no plans for any formal teleconference between the finance ministers of the 16 countries that use the euro.

Officials in Brussels and Dublin said that Ireland had not made any formal application for a loan and that without such an application, no bailout could be approved or executed.

According to a report by Barclays Capital, the European Union and the International Monetary Fund would need to loan 80 billion to 85 billion euros, 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.

Finance officials are scheduled to meet on Tuesday and Wednesday to discuss the Irish situation.

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 euros that is guaranteed by the union’s budget and set up to provide rapid assistance to countries in “acute difficulties,” one European official said. The official spoke on the condition of anonymity because of the delicacy of the situation and 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. That pool totals 440 billion euros, the official said. 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 a very different case.

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 applying for 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.