Irish Aid Talks Stop Short of Bailout as EU Lauds Austerity
Jean-Claude Juncker, Luxembourg's prime minister
Jock Fistick/Bloomberg
Jean-Claude Juncker, Luxembourg's prime minister and president of the Eurogroup.
Jean-Claude Juncker, Luxembourg's prime minister and president of the Eurogroup. Photographer: Jock Fistick/Bloomberg
Nov. 17 (Bloomberg) -- Dermot O'Leary, chief economist at Goodbody Stockbrokers, talks about the outlook for the Irish economy and the banking system. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
Nov. 17 (Bloomberg) -- Nick Firoozye, head of interest-rate strategy at Nomura International Plc, talks about the outlook for Irish public finances and the risk of debt contagion across Europe. He speaks with Maryam Nemazee on Bloomberg Television's "Countdown." (Source: Bloomberg)
Nov. 16 (Bloomberg) -- Mark Grant, managing director at Southwest Securities Inc., Vassili Serebriakov, a currency strategist at Wells Fargo & Co., and John Brynjolfsson, chief investment officer at Armored Wolf LLC, talk about Ireland's fiscal crisis. European finance ministers today voiced confidence that Ireland will ride out its crisis, ducking investors’ pleas for an immediate bailout package and risking a renewed convulsion on bond markets. Grant, Serebriakov and Brynjolfsson speak with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
European finance ministers started work on possible aid for Ireland’s debt-laden banks, stopping short of an immediate bailout package and risking a setback in bond markets.
Finance chiefs from the 16-country euro area lauded Ireland’s budget cuts, echoing the rhetorical support offered in the early stages of Greece’s debt trauma before a rescue became necessary. Ireland said it won’t plead for money when European and International Monetary Fund officials arrive in Dublin tomorrow to begin talks on the banking system’s needs.
“If banking problems are too big for this small country to manage, Europe has made it clear they’ll help,” Irish Finance Minister Brian Lenihan told state broadcaster RTE today before meetings of European finance ministers wrap up in Brussels.
As Europe struggled to present a united front to stem the widening debt crisis, Britain said it would back support for Ireland, abandoning a hands-off policy toward the euro region to prevent Irish bank woes from spilling over into the closely connected U.K. market.
In a potential blow to Ireland, LCH Clearnet Ltd. raised the margin requirement for Irish bond trading to 30 percent of net positions, making it more expensive to buy Irish securities.
Irish bonds slipped for a second day, pushing the 10-year yield up 4 basis points to 8.50 percent. The extra yield over German bunds rose 2 basis points to 564 basis points. The spread, a measure of the risk of investing in Ireland, peaked at 646 basis points on Nov. 11.
Banking Focus
The Dublin consultations with the ECB, European Commission and IMF will “see if the state is able to cover the needs of the banking sector,” Belgian Finance Minister Didier Reynders told reporters today. “If that’s not the case, there will probably have to be a European intervention.”
Such a package could come together quickly, the officials said. “Is it six months or a few days away? I’d say it’s closer to days,” French Finance Minister Christine Lagarde said.
Ministers refused to speculate about Ireland’s financial needs, estimated by Barclays Capital at about 80 billion euros ($108 billion). Klaus Regling, manager of the rescue facility, said the EU could raise the money in five to eight working days.
Britain, which didn’t contribute to the 860 billion euros in loans and pledges in the wake of the Greek crisis, “stands ready to support Ireland,” U.K. Chancellor of the Exchequer George Osborne said today in Brussels.
Stock Losses
Ireland’s five-member ISEQ Financial Index of banking stocks is now worth 2 percent of the peak valuation reached in February 2007. Officials put the cost of cleaning up the banking system as high as 50 billion euros, equal to about a third of Ireland’s economic output.
To boost confidence, Lenihan may release the 2011 budget before a planned Dec. 7 publication date and will unveil a four- year deficit-cutting plan next week.
Steps already taken to salvage Ireland’s banking system, which is increasingly reliant on ECB funding, will billow the deficit to 32 percent of gross domestic product in 2010. That’s a record in the 12-year history of the euro and more than 10 times the bloc’s 3 percent limit.
Investors watched the EU’s handling of Ireland for clues to the fate of Portugal and Spain, two other countries forced by the EU to impose spending cuts to rein in excessive deficits.
A declaration released late yesterday mirrored a Feb. 11 show of support for Greece, which ushered in three months of politicking -- centered on Germany’s reluctance to part with taxpayer money -- before the bloc crafted a 110 billion-euro rescue formula.
‘On Track’
Separate statements by the ministers saluted Portugal’s “appropriate measures” to meet deficit-cutting targets and said Greece is “broadly on track” with its austerity plans.
German demands prompted the latest phase in the crisis, when EU leaders on Oct. 29 agreed to consider German Chancellor Angela Merkel’s demand for a crisis-resolution mechanism that forces bondholders to share the cost of future bailouts.
That pledge triggered 13 straight days of losses in the Irish bond market and dragged down Portuguese, Greek and Spanish securities. 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.
Merkel Fallout
Merkel wants to penalize bondholders for betting against fiscally unsound governments after the EU’s temporary rescue fund runs out in 2013. In Paris on Nov. 15, Greek Prime Minister George Papandreou blamed her for creating a “self-fulfilling prophecy” that hurt peripheral countries.
The Greek criticism drew a German rebuke yesterday. “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 in Brussels. “But solidarity is not a one-way street. That shouldn’t be forgotten in Greece.”
The German initiative reflected a revolt by taxpayers in richer EU countries against underwriting others at a time of 10.1 percent euro-area unemployment.
Austrian Finance Minister Josef Proell said the payment of the next tranche of aid for Greece will be delayed until January after the government in Athens missed a revenue-raising target. Finland’s Jyrki Katainen said that Ireland should be forced to put up collateral for any aid.
“The problem isn’t Ireland per se but the fact that Germany and France have pushed for a treaty change with the option of a state default,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “The contagion effect will remain as long as there’s no certainty about what’s going to happen beyond 2013.”
To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Stephanie Bodoni in Brussels at sbodoni@bloomberg.net
To contact the editor responsible for this story: James Hertling or jhertling@bloomberg.net
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