Germany is pressing Ireland to seek aid before a Nov. 16 meeting of European finance ministers to calm market volatility and win agreement on making investors help pay for future bailouts, a German government official said.
Unless investor concerns about an Irish default are allayed, Chancellor Angela Merkel’s plan to require investors to take write-offs in sovereign rescues as part of a crisis- resolution mechanism will be jeopardized, said the official, who declined to be identified because the talks are private.
Merkel has publicly clashed with European Central Bank President Jean-Claude Trichet over the permanent mechanism to take effect in 2013, which is to be drafted by mid-December, with Trichet saying that requiring investors to take losses in a sovereign rescue would undermine confidence. Euro-area leaders are divided over Merkel’s proposal as well as over whether Ireland should seek aid now, said the German official.
An Irish request for aid “would take pressure off the discussion of the mechanism right now,” said Carsten Brzeski, a senior economist at ING Groep NV in Brussels. “But once that’s decided upon we will get only new speculation about what it means for all of the countries using the fund as 2013 nears.”
Ireland says no aid talks are under way and that it doesn’t need the money, even as traders anticipating a bailout sent Irish debt soaring Nov. 12. A request for aid may total about 80 billion euros ($110 billion) between 2011 and 2013, according to Barclays Capital.
Irish Finance Minister Brian Lenihan will resist any effort at the finance ministers’ meeting to be forced to tap the European Financial Stability Facility, the Sunday Times reported today without citing sources.
Ireland is not going to give up its “hard-won” sovereignty, O’Keeffee said today on Dublin-based RTE radio.
Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, said Nov. 12 there was “no immediate reason” to think Ireland will request cash and that officials wouldn’t meet before the regular monthly talks in Brussels.
While Ireland says it doesn’t need to raise money until mid-2011, its shattered banks, which have grown increasingly reliant on the ECB, may be the focus of policy makers.
Bailing out Ireland’s financial system could cost as much as 50 billion euros under a “stress case” scenario compiled by the Finance Ministry and central bank. The country’s gross funding need for 2011 will be 23.5 billion euros, falling to 18.6 billion euros in 2014, the nation’s debt agency says.
The International Monetary Fund stands ready to help Ireland if needed, Managing Director Dominique Strauss-Kahn said yesterday in Yokohama, Japan.
“So far I haven’t received any kind of request,” he said. “If at one point in time, tomorrow, in two months or two years, the Irish want support from the IMF, we will be ready.”
Cowen said for the first time Nov. 12 that he was working with fellow EU leaders as “there are issues affecting the wider euro area” and that they are trying to “ensure that the bond markets respond positively to the euro.” He reiterated that his debt-strapped country hasn’t sought cash.
In a Nov. 12 conference call of ECB officials, Ireland was pressed to seek outside help within days, a person briefed on the discussions said on condition of anonymity. Separately, an EU official said a request for assistance was likely even as Lenihan told RTE Radio that such a call “makes no sense” because the government is fully funded into next year.
Settling concerns over Ireland would help Germany make its case to other euro-area countries on debt write-offs, the German official said. Speaking in Seoul before the Group of 20 summit last week, Merkel appealed to markets for understanding over her push to force investors to help pay for any future crises, acknowledging that her stance risks stoking “conflict.”
“I ask the markets sometimes to bear politicians in mind, too,” Merkel said. “We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks rather than those who make a lot of money taking those risks.”
Juncker, Trichet and Spanish Prime Minister Jose Luis Rodriguez Zapatero have criticized her stance. Zapatero said Nov. 12 that Spain opposes her plans, and so “it won’t be easy” for her to win agreement for the proposal.
“This could potentially drive investors from the euro zone, especially from the peripheral countries,” Juncker told European lawmakers in Brussels Nov. 8. Europe would be isolated by declaring “ex ante that in every instance of crisis resolution, the private sector has to be implicated.”
Bonds in Ireland, Portugal and Greece have plummeted since EU leaders agreed on Oct. 29 to draft a permanent crisis mechanism to replace the euro rescue fund set up in May once its mandate expires in 2013.
Merkel’s proposal to involve debt restructuring with losses for private holders of sovereign bonds hasn’t “been helpful,” Cowen said in an interview with the Irish Independent newspaper published Nov. 12. Merkel rejected such criticism, saying in Seoul “the future crisis mechanism has nothing to do with the debate going on right now.”
The premium that investors demand to hold Irish 10-year sovereign bonds over the benchmark German bonds fell to 564 basis points by the end of the week, down from a record 646 points Nov. 11.
Yields on bonds of Spain and Portugal also jumped earlier in the week amid concern that fallout from Ireland would spread. The extra yield that investors demand to hold Portuguese 10-year bonds instead of German bunds climbed to a record 484 basis points on Nov. 11.
Ireland’s woes formed part of the debate at the Seoul summit, from which the finance chiefs of Germany, France, the U.K., Spain and Italy successfully cooled market concerns by saying in a statement that a plan being debated to have investors cover future bailout costs would have “no impact whatsoever” on existing debt.
“Clarification was needed and it is good news it’s now out there,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc.
Irish officials have indicated they hope a 2011 budget, due for release on Dec. 7, will placate markets as they try to cut a budget deficit which will be about 12 percent of gross domestic product this year, or 32 percent when the costs of the banking rescue are included. Lenihan’s plan includes 6 billion euros of spending cuts and tax increases next year.
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