Ireland was prodded by European Central Bank council member Miguel Angel Fernandez Ordonez to make a “final decision” on its fiscal crisis to calm markets as finance ministers prepare to discuss an aid plan.
“The situation in the markets in recent weeks has been very negative due in some way to the lack of a final decision by Ireland,” Ordonez told reporters today in Madrid. “It’s not me who should take a decision about Ireland, it’s Ireland that should take the right decision at the right moment.”
The comments by Spain’s central bank governor underscore pressure on Ireland to accept a bailout and help reverse a bond sell-off among the euro-region’s deficit-laden nations. Germany has pressed for Ireland to take aid before tomorrow’s ministers’ meeting in Brussels, according to a German government official.
Allaying investor concerns about Irish finances would help advance Chancellor Angela Merkel’s plan to require investors to help pay for future rescues, a German government official said. European leaders remain divided on Merkel’s proposal, the timing of a bailout for Ireland and whether the ECB should keep buying bonds of debt-laden countries.
“As long as European governments go back and forth, the markets won’t settle down,” said Marco Annunziata, chief economist at UniCredit Group in London. “We’re likely to see markets getting more nervous and worried about what is going on in Europe.”
The yield on Ireland’s 10-year notes fell 10 basis points to 8.263 percent at 10:30 a.m. in London. It has jumped more than 200 points in the past month. The euro weakened 0.4 percent to $1.3637.
While Ireland says it doesn’t need to raise money until mid-2011, its banks, weakened by a property-market collapse, have grown increasingly reliant on the ECB as the country’s borrowing costs rise. Borrowing from the ECB by lenders in Ireland rose 7.3 percent to 130 billion euros as of Oct. 29, about 80 percent of gross domestic product.
A request for aid may total about 80 billion euros ($110 billion) between 2011 and 2013, according to Barclays Capital. French Finance Minister Christine Lagarde said today on France Info radio no aid request has been made.
Ireland’s Finance Minister Brian Lenihan may ask European counterparts in Brussels to consider allowing the nation’s banks tap the EU’s emergency fund, the Irish Independent said today , without citing anyone. The government is also considering bringing forward the announcement of next year’s budget, scheduled to be unveiled Dec. 7, by a week, the Dublin-based newspaper said.
Allied Irish Banks Plc, the second-largest bank, is due to release a trading statement this week, where it may give details on its funding situation. Dublin-based Bank of Ireland Plc said last week its loan-to-deposit ratio rose to about 160 percent from 145 percent on June 30 after outflows from its capital- markets unit.
The premium that investors demand to hold Irish 10-year bonds over the benchmark German bonds was 556 basis points, compared to 563 points on Nov. 12 and a record 646 Nov. 11.
Irish officials had said as recently as yesterday lunchtime that a bailout wasn’t being considered. Seeking aid hasn’t been discussed by Irish Prime Minister Brian Cowen’s Cabinet, Enterprise Minister Batt O’Keeffe told broadcaster RTE, denying that there is a “crisis.”
Ireland is not going to give up its “hard-won” sovereignty, O’Keeffe said on RTE. The ruling Fianna Fail party grew out of the armed movement that opposed the treaty with Britain dividing Ireland in the 1920s.
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. That prompted European finance chiefs to issue a statement at a Group of 20 summit in Seoul last week saying the plan being debated to have investors cover future bailout costs would have “no impact” on existing debt.
Ordonez said in the speech that “it should be hoped that an appropriate reaction on the part of the Irish authorities,” along with the statement from the G-20, will “help to calm the markets.”
Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro finance ministers, said Nov. 12 there was “no immediate reason” to think Ireland will seek cash and that officials wouldn’t meet before the monthly talks in Brussels.
Yields on bonds of Spain and Portugal also jumped 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. Foreign Minister Luis Amado told Expresso magazine day earlier that the country’s membership of the euro could be at stake if the country fails to grapple with its deficit.
Greece’s spread was little changed at 887 basis points today. Revised figures from the EU’s statistics office today showed that Greece had the euro region’s largest budget deficit last year. It was changed to 15.4 percent of GDP from 13.6 percent. That surpassed Ireland’s 14.4 percent shortfall.
An Irish decision to seek financial help “is a purely political decision on the back of an assessment of the broader risk of the spread levels to economic and financial stability,” said Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London.
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.
“While the sovereign is fully funded through the first half of next year, consideration also has to be given to the banking situation,” Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin, said in an interview.
The International Monetary Fund stands ready to help Ireland if needed, Managing Director Dominique Strauss-Kahn said Nov. 13 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.”
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. Bundesbank President Axel Weber has called for ending the ECB’s emergency bond-buying program, which has benefited deficit-laden countries such as Ireland, Portugal and Greece.
Balance Sheet Damage
The risk for the ECB is that buying those bonds could eventually hurt the central bank’s balance sheet, damaging its independence.
Irish officials have indicated they hope the 2011 budget 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.
“The ecofin meeting is crucial to resolving this,” O’Leary said. “There is every reason to be a standoff. It’s a big decision for Ireland to seek aid, with big consequences. On the other hand, Europe wants to nip the situation in the bud.”