Tags: Ireland Discusses 1 Trillion Bailout as EU Struggles to Quell Debt Crisis

Ireland Discusses $1 Trillion Bailout as EU Struggles to Quell Debt Crisis

Tuesday, 16 Nov 2010 11:49 AM

Ireland was in talks over a financial rescue as European Union leaders battled to shield Portugal from the resurgent debt crisis and new clouds emerged over Greece’s economic health.

“We are in a survival crisis,” EU President Herman Van Rompuy said at the European Policy Centre in Brussels today. “If we don’t survive with the euro zone we will not survive with the European Union.”

Public clashes among EU officials over how to defuse Europe’s debt bomb marked a new stage in the crisis triggered by Greece’s near-default in May that forced the EU to set up a 750 billion-euro ($1 trillion) rescue fund to keep the euro intact. A European Central Bank official threatened an end to its economy-boosting measures.

Irish bonds fell, reversing a two-day rally, on concern that European finance ministers might fail to strike a deal at a meeting in Brussels that started at 5 p.m. today. The euro slid 0.3 percent to $1.3549.

“We are discussing with both the ECB and the IMF and of course the Irish,” EU Economic and Monetary Affairs Commissioner Olli Rehn said on his way into the meeting. “The real problems are in the banking sector,” not with the government, “but these are connected.”

Ireland is negotiating with the EU and International Monetary Fund about aid to shore up the state’s finances, furnish capital for the country’s banks and spare it from tapping the bond market for an extended period, the European official said on condition of anonymity. Spokesmen for the Irish central bank and Finance Ministry declined to comment.

Irish Yields Rise

The aid package may total about 80 billion euros, according to Barclays Capital.

The yield on Ireland’s 10-year bond rose 28 basis points to 8.44 percent. The extra yield over German bunds rose to 561 basis points from 540 basis points yesterday. The spread, a measure of the risk of investing in Ireland, peaked at 646 basis points on Nov. 11.

“Once the bond spreads started to spike, whatever avenue looked at, it was very difficult to see how we were going to avoid a bailout,” NCB Stockbrokers Chief Economist Brian Devine said. “We probably could have handled a budgetary fiscal crisis on its own, but not a fiscal and banking crisis.”

Stark’s Threat

ECB Executive Board member Juergen Stark upped the stakes, saying in Frankfurt that the ECB will continue to scale back emergency stimulus measures “notwithstanding the most recent tensions in some segments of the European sovereign debt market.”

Stark’s views are “unhelpful to say the least,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London. “It’s a bold call to make when you have three countries in your region effectively cut off from the markets.”

A split on the ECB council has added to market tensions, with President Jean-Claude Trichet’s program of buying bonds of deficit-hit states lacking the support of Axel Weber, head of Germany’s central bank. Another ECB council member, Spain’s Miguel Angel Fernandez Ordonez, yesterday blamed Ireland for equivocating over EU aid.

As Ireland’s fate took center stage, concern mounted that Portugal would be the next country in the crossfire and that Spain, the euro region’s fourth-largest economy, might come under speculative pressure. Cyprus, which adopted the euro in 2008, had its long-term sovereign credit rating lowered to A from A+ by Standard & Poor’s Ratings Services today.

‘Risk of Contagion’

“There is a risk of contagion,” Portuguese Finance Minister Fernando Teixeira dos Santos said in an interview yesterday. “But there’s a big difference between saying there is a risk of contagion and saying help is imminent or that we are going to ask for help.”

The latest leg in the debt crisis began Oct. 29 when EU leaders agreed to consider German Chancellor Angela Merkel’s demand for the setup of a permanent crisis-resolution mechanism that forces bondholders to share the cost of future bailouts.

That pledge provoked 13 straight days of losses in the Irish bond market and dragged down Portuguese, Greek and Spanish bonds. To stem the damage, Merkel on Nov. 12 signed up to a five-country declaration that exempts bonds now on the market from a restructuring that could be imposed under a permanent system to be created by 2013.

Papandreou’s Criticism

Merkel wants to penalize bondholders for betting against fiscally unsound governments after the EU’s temporary rescue fund runs out in 2013. In Paris yesterday, Greek Prime Minister George Papandreou blamed the German proposal for creating a “self-fulfilling prophecy” that led weaker countries’ interest rates to “spiral.”

The Greek criticism drew a German rebuke today. “When I heard the comments by the Greek prime minister I thought, with all due respect, that Greece has enjoyed a lot of European and German solidarity,” German Finance Minister Wolfgang Schaeuble said before the Brussels meeting. “But solidarity is not a one- way street. That shouldn’t be forgotten in Greece.”

The German demands reflected a revolt by taxpayers in richer EU countries against underwriting fiscally unsound governments at a time of 10.1 percent euro-area unemployment. Finland insisted today that Ireland be forced to put up collateral for any aid.

Austrian Finance Minister Josef Proell said he is considering withholding the country’s share of the next part of Greece’s 110-billion euro rescue, saying the Athens government missed a revenue-raising target.

That disclosure triggered losses in Greek bonds, pushing the extra yield over 10-year German bonds up by 12 basis points to 898 basis points.

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Ireland was in talks over a financial rescue as European Union leaders battled to shield Portugal from the resurgent debt crisis and new clouds emerged over Greece s economic health. We are in a survival crisis, EU President Herman Van Rompuy said at the European Policy...
Ireland Discusses 1 Trillion Bailout as EU Struggles to Quell Debt Crisis
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Tuesday, 16 Nov 2010 11:49 AM
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