Ireland signaled a willingness to weigh European Union measures to aid its banks, potentially abandoning a go-it-alone defense to prevent a resurgent debt crisis from destabilizing the euro.
With European Central Bank officials urging Ireland to set aside national pride and tap the 750 billion-euro ($1 trillion) fund created in May, Prime Minister Brian Cowen put aid for banks on the agenda of a meeting of euro finance ministers today.
“We have to discuss these matters with partners as to how best to underpin financial and banking stability within the euro area,” Cowen told state broadcaster RTE in an interview late yesterday. Ireland has not asked for any bailout, he said.
The Irish turmoil marks a new stage in a sovereign debt crisis that was triggered by Greece and threatened to break the euro region apart in May. Irish bonds tumbled today, reversing a two-day surge, on concern that today’s Brussels meeting might end without a deal to shore up Ireland’s banks.
“We are in a survival crisis,” EU President Herman Van Rompuy said at the European Policy Centre in Brussels today. “If we don’t survive with the euro zone we will not survive with the European Union.”
The euro was little changed at $1.3610 at 12:18 p.m. in London. The yield on Ireland’s 10-year bond rose 21 basis points to 8.364 percent. The extra yield over German bunds rose to 559 basis points from 540 basis points yesterday. Refusal to tap EU funds would push Ireland’s borrowing costs higher again, Deutsche Bank AG said.
Spreads at Risk
“The recent rally increases the chances that Ireland won’t ask for any aid but the reality is that spreads are at risk of rewidening if they don’t,” Deutsche Bank strategists Jim Reid in London and Colin Tan in Sydney wrote in an investor note.
Cowen is due to appear in Dublin’s parliament from 2:30 p.m. for a regular question session with lawmakers. European ministers meet at 5 p.m. in Brussels, with no set time for a conclusion.
Cowen’s indication of possible EU aid for the banking system marks a shift from last week, when the government said there were no talks under way with European authorities. Ireland isn’t filing a request “for the funding of the state” since it has enough cash to last until mid-2011, he said.
Cowen doubted a concrete agreement would emerge from today’s meeting. Luxembourg Prime Minister Jean-Claude Juncker, who runs the meeting, and EU Economic and Monetary Commissioner Olli Rehn will brief the press afterwards.
Ireland is “edging” toward accepting aid for banks, the Dublin-based Irish Independent reported, without citing anyone. To fend off a bailout for the state, Irish Finance Minister Brian Lenihan is “poised” to agree a bank injection, the newspaper said today.
“Ireland’s going to need to take some deal from Europe,” Columbia University professor Jeffrey Sachs, who advised eastern European governments on post-Cold War market reforms, said in a Bloomberg Television interview yesterday.
As Ireland insisted it doesn’t need handouts for its public budget, ECB Vice President Vitor Constancio said it would be able to use the emergency fund set up to support euro-area governments to recapitalize banks reeling from the bursting of the real-estate bubble.
An Irish aid appeal “would stabilize the situation,” Constancio told reporters in Frankfurt today. “Several countries are under pressure.”
The risk is that Ireland’s crisis spreads to Portugal and, eventually, to Spain, the euro region’s fourth-largest economy. Portuguese Finance Minister Fernando Teixeira dos Santos yesterday indicated the risk to his country’s economic independence if the crisis mounts.
“There is a risk of contagion,” he said in an interview when asked whether Portugal will seek EU aid. “But there’s a big difference between saying there is a risk of contagion and saying help is imminent or that we are going to ask for help.”
For now, German Chancellor Angela Merkel is still pushing for a quick resolution to a crisis she helped exacerbate on Oct. 29. Merkel won an EU pledge to consider her demand that bondholders share the costs of future EU bailouts, sparking a 13-day losing streak for Irish bonds.
Getting it Wrong
That forced her to backpedal last week and sign a five-country declaration on Nov. 12 exempting outstanding securities from a restructuring that could be imposed under a permanent rescue mechanism to be created by 2013.
Germany “got it wrong and they’re trying to fix it,” said Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin. Merkel is “trying to send a clear message that Germany is pro-European, that they are ready to help out Ireland, Portugal and other countries if necessary and they will not put the euro at risk.”
While hazy on the details, Merkel wants to penalize bondholders for betting against fiscally unsound governments after the EU’s temporary rescue fund runs out in 2013, Deputy Finance Minister Steffen Kampeter said.
“Don’t underestimate Germany on this,” Kampeter said late yesterday in an interview in Karlsruhe. Merkel’s government “stands full-square behind involving private investors in bailouts.”
A split on the ECB council has added to market tensions, with the Trichet-backed program of buying bonds of deficit-hit states lacking the support of Axel Weber, head of Germany’s central bank. Another ECB council member, Spain’s Miguel Angel Fernandez Ordonez, yesterday blamed Ireland for equivocating over EU aid.
Ireland’s top two banks -- Bank of Ireland Plc and Allied Irish Banks Plc -- are growing increasingly reliant on the ECB for funding. ECB loans to Irish banks rose 7.3 percent to 130 billion euros in October from the previous month, Ireland’s central bank said on Nov. 1.
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. Irish and international banks’ loan losses in the country may total at least 85 billion euros, central bank Governor Patrick Honohan said on Nov. 11.
“There is a problem with liquidity in banks,” Dick Roche, Ireland’s European affairs minister, said on BBC Radio 4’s “Today” program. “But I don’t think the appropriate response to that would be for the European finance ministers to panic.”