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Ireland Resists EU Bailout as Germany Pushes Aid to Calm Market

Finance Minister Brian Lenihan
Irish Finance Minister Brian Lenihan. Photographer: Crispin Rodwell/Bloomberg

Ireland rejected speculation that it was seeking a rescue before a Nov. 16 meeting of European finance ministers as Germany pushed for aid to calm volatility that sent borrowing costs of debt-laden countries to records.

A bailout hasn’t been discussed by Irish Prime Minister Brian Cowen’s Cabinet, Enterprise Minister Batt O’Keeffe said today on Dublin-based broadcaster RTE, refuting talk that there is a “crisis.” He said Ireland has no immediate need for cash.

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. Euro-area leaders are divided over Merkel’s proposal as well as over whether Ireland should seek aid now, he said.

“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.”

Ireland says no aid talks are under way 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.

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.


“We have a standoff as clearly the incentives are different,” Annunziata said. “It’s too easy for Germany to continue to push Ireland to take the money and allow it to discuss its proposals without market tensions. But Ireland is correct in pushing back as they were taking proactive policies and had a fighting chance before Germany.”

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’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.

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.

‘Political Decision’

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.

The premium that investors demand to hold Irish 10-year 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 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.

While Ireland says it doesn’t need to raise money until mid-2011, its shattered banks, which have grown increasingly reliant on the European Central Bank, may be the focus of policy makers. 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.

Irish Banks

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.

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.

IMF ‘Ready’

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. 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.

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.

“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.”

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