November 18, 2010 / 7:53 AM / 9 years ago

Irish central bank expects EU/IMF loan; markets rebound

DUBLIN (Reuters) - Ireland’s central bank chief said on Thursday he expected Dublin to receive tens of billions of euros in loans from European partners and the IMF to provide stand-by funds for its shattered banks.

A pedestrian walks past sign protesting against high rents on Grafton Street, in central Dublin November 15, 2010. REUTERS/Cathal McNaughton

Central Bank Governor Patrick Honohan was speaking as officials of the European Commission, the European Central Bank and the International Monetary Fund began talks at the bank and the finance ministry on a possible rescue package.

“We’re talking about a very substantial loan for sure — tens of billions, yes,” Honohan told state broadcaster RTE, acknowledging substantial outflows of funds from the Irish banking sector since April.

The government said talks would run into next week and Finance Minister Brian Lenihan told parliament Dublin was not yet at the point of requesting a loan and he could not put a figure on the amount needed.

Lenihan later told national broadcaster RTE in an interview that Ireland would clearly need some form of external assistance.

What was under discussion was “substantial contingency capital to be made available to back Ireland.”

He insisted the IMF and EU would not have any input into Ireland’s budgetary measures, even though EU rules stipulate that assistance programmes can only be granted to governments that sign a strict fiscal conditionality agreement.

In an effort to calm savers, Lenihan said the government was extending an unlimited guarantee for depositors until the end of next year, six months longer than previously announced.

Irish banks have suffered withdrawals from corporate clients and Honohan said “a steady drain of deposits” had necessitated exceptional funding from the Irish central bank on top of ECB liquidity assistance.

After 10 days of losses, European stock and bond markets and the euro rebounded on expectations Ireland would become the second euro zone country after Greece to receive a bailout to cope with high debts and deficits.

Dublin’s borrowing costs have gone through the roof since late October as concerns about the banks’ swelling liabilities and German-driven EU moves to create a system for restructuring stricken euro zone states’ debts unsettled investors.

Irish bond spreads over German Bunds narrowed and the cost of insuring Irish, Portuguese and Greek debt against default fell as markets anticipated a likely rescue.

Ratings agency Fitch, which has Ireland on A-plus with a negative outlook, said it would review that credit rating in the light of any IMF-EU package, and warned there was “considerable uncertainty” about possible additional losses in the banking system, including from residential mortgage lending.

Spain found solid demand for 3.6 billion euros (£3.06 billion) in 10- and 30-year bonds at an auction but had to pay a higher price than two months ago, as did fellow euro zone struggler Portugal, which sold treasury bills on Wednesday.

That helped dampen fears of contagion from Ireland to other highly-indebted euro zone members.

NIGHTMARES

The chief executive of Italy’s biggest bank, Federico Ghizzoni of UniCredit, said he had “nightmares” over the euro zone debt crisis and was worried about Europe’s ability to address sovereign debt issues urgently.

European Central Bank President Jean-Claude Trichet voiced concern at the danger of banks growing dependent on the ECB’s emergency liquidity measures as conditions normalise.

Irish banks, largely shut out of market lending due to concerns about their solvency, are almost entirely reliant on ECB funding, which reached 130 billion euros by end-October, plus an extra 35 billion euros from the Irish central bank.

EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

In an indication of potentially tough negotiations ahead, France said Dublin may have to raise its ultra-low 12.5 percent corporation tax rate — a taboo in Irish politics — in return for the assistance package.

Higher-tax countries, including Britain, Germany and France, whose approval would be required for any emergency loans, have long seen the Irish rate as a form of unfair competition.

Greece pledged to raise its Value Added Tax, freeze pensions and cut government waste further in 2011 to meet the terms of its EU/IMF bailout after admitting it will miss this year’s deficit reduction target.

But Irish Deputy Prime Minister Mary Coughlan told parliament the corporate tax rate was “non-negotiable.”

Prime Minister Brian Cowen has repeatedly rejected suggestions that his government is discussing a bailout that would place public finances under EU-IMF supervision.

Lenihan is due to detail a four-year, 15 billion euros budget-cutting plan next week and the government will put a 2011 austerity budget to parliament on December 7.

Slideshow (8 Images)

Some analysts said Cowen is playing for time to avoid applying for aid before a key November 25 by-election that could reduce his parliamentary majority to just two seats.

Ireland has said the bill for cleaning up its banks could top 50 billion euros but investors fear the final figure could be even higher given rising residential mortgage arrears, deposit outflows and higher funding costs.

Britain, whose banks have around $150 billion of exposure to Irish debt, has said it stands ready to help. Prime Minister David Cameron told parliament London could provide bilateral assistance or join an EU mechanism, or both.

Additional reporting by Natsuko Waki in Dublin, William James in London, Arno Schuetze and Edward Taylor in Frankfurt; Nick Vinocur in Paris, writing by Paul Taylor, editing by Ron Askew

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