— Move Hailed By ECB, EU Finance Ministers; E80-E90 Billion Seen

PARIS (MNI) – After resisting the entreaties of its European
partners for a week, Ireland on Sunday bowed to the inevitable and
announced it was applying for aid from the European Union and the
International Monetary Fund.

Senior Eurozone and EU officials, who had been pressuring Ireland
to seek aid, quickly agreed to the request.

The Irish government will open formal talks with the European
Commission and the IMF on the details of the package, including not only
its amount but also the policies Ireland will be expected to implement
in exchange for the money. Eurosystem sources told Market News
International Sunday night that the size of the bailout package under
consideration would be somewhere around E80 billion to E90 billion.

But Germany’s Finance Minister Wolfgang Schaeuble said a figure
could not yet be put on the size of the bailout. “One cannot name a
concrete figure at the moment, we are in the middle of consultations,”
Schaeuble told Germany’s public television ZDF on Sunday. “Ireland has
applied and now it is being worked on with high priority,” he said.

Ireland’s Prime Minister Brian Cowen said he expected an agreement
“to be finalized shortly, within the next few weeks.”

European finance ministers and the European Central Bank hailed the
decision in separate but closely coordinated statements — both saying
that providing assistance to the Irish government was “warranted to
safeguard financial stability in the EU and in the euro area.”

Both the ECB and the finance ministers stressed that the bailout
package would have “strong” policy conditions attached.

Ireland’s central bank governor Patrick Honohan also welcomed the
government’s decision, which he said would “allow the course of economic
and financial policy to be set on a more secure path.”

He added: “We can be reassured that the Irish banking system
retains the support, not only of the Central Bank of Ireland, but of the
European Institutions.”

IMF Managing Director Dominique Strauss-Kahn greeted the news with
a pledge to participate in the package. “At the request of the Irish
authorities, the IMF stands ready to join this effort, including through
a multi-year loan,” he said.

Ireland’s change of heart was first revealed earlier Sunday on
state-run RTE Radio by Finance Minister Brian Lenihan, who declared that
the country’s severely troubled banking sector had become “too big a
problem for the country.” He said the country needed to ensure it was
able to finance itself in financial markets in order to keep the economy
stable.

“For all these reasons, I will be recommending to the government
that we should apply [for] a program and open formal negotiations,”
Lenihan said.

Cowen said the aid program “will include a fund for potential
future capital needs of the banking sector” and will “involve
restructuring of the banking system.”

“Put simply, the Irish banks will become significantly smaller than
they have been in the past so that they can gradually be brought to
stand on their own two feet once more,” Cowen said.

Conditions for receiving financial aid would also include a fiscal
plans with higher taxes and lower spending to bring public finances on a
sustainable path, he said.

One bone of contention in the upcoming negotiations could be
Ireland’s extraordinarily low corporate tax rate. Other European
governments with much higher tax rates have long viewed Ireland’s low
business tax climate as a kind of “fiscal dumping,” and they may try to
leverage the weak Irish position to try and force Dublin to raise the
rate. But the Irish government has said thus far that the corporate tax
issue is off limits.

Cowen said that while he was not in the position to give details of
the plan yet, a hike of Ireland’s corporate tax had thus far not been
part of the talks.

The Irish decision to formally request an aid package opens a new
chapter in the Eurozone after several weeks of suspense in which
financial markets had ferociously attacked Irish sovereign debt for fear
that the cost of bailing out the country’s banks was becoming an
unsustainable weight around the neck of the government.

Also weighing on Irish debt — as well as on other Eurozone
peripherals, including Portugal, Spain and Greece — was a German
proposal to make private creditors shoulder a share of the costs in
future sovereign bailouts.

Irish spreads against the benchmark German Bund hit record highs at
one point earlier this month. Portuguese, Greek and even Spanish debt
also came under increasing pressure, as fissures in the Eurozone not
seen since May began to reappear in a dramatic fashion.

The spreads narrowed somewhat after five EU finance ministers put
out a statement at the Group of 20 meeting on Nov. 12 saying the German
proposal being considered was for the future and assuring current
holders of sovereign bonds that they would not be asked to contribute to
any bailout costs.

But that episode in the markets convinced senior European officials
that the very survival of the Eurozone was once again at stake. They
quickly began to ratchet up the pressure on the Irish government to
accept aid despite the domestic political perils of doing so.

ECB Executive Board member Lorenzo Bini Smaghi warned last week
that the risks related to the Irish debt crisis would grow the longer
the country waited before seeking aid. “There’s also the risk of a
contagion of other highly indebted Eurozone countries,” he asserted.

Ireland’s reluctant choice will make it the second Eurozone country
to get a bailout this year, after Greece negotiated an emergency E110
billion loan package with the EU and IMF in May.

The process this time will be much the same: the European
Commission and the IMF will conduct negotiations with the Irish
government, and the ECB will collaborate closely with them —
particularly in monitoring the implementation of policies that are
ultimately agreed on.

The EU and Eurozone finance ministers said the money for Ireland
would come both from the E60 billion European Financial Stabilization
Mechanism and the newly created E440 billion European Financial
Stability Facility.

Those funds might also be supplemented by bilateral loans from EU
members, the finance ministers said, noting that “the United Kingdom and
Sweden (both non-Eurozone members) have already indicated today that
they stand ready to consider a bilateral loan.”

The BBC reported that its political editor Nick Robinson, based on
his contacts with government sources, believed the UK contribution would
be around 7 billion pounds sterling.

The European finance ministers said the program would “address the
fiscal challenges of the Irish economy in a decisive manner. It will
build on the fiscal adjustment and structural reforms” to be unveiled by
the Irish government next week in its four-year budget plan, they said.

The plan is expected to lay out the details of the government’s
strategy to reduce the budget deficit by E6 billion in 2011 and to bring
it back down to the EU’s 3%-of-GDP limit by 2014.

This year, Ireland’s budget deficit is expected to hit a staggering
32% of GDP because of the heavier-than-expected, and possibly still
growing, cost of bailing out its bad-asset-choked banking sector.
Factoring out the cost of the banks, the Irish deficit is still
projected at over 11% of GDP this year, one of the highest in the EU.

“Given the strong fundamentals of the Irish economy, decisive
implementation of the programme should allow a return to a robust and
sustainable growth, safeguarding the economic and social cohesion,” the
finance ministers said.

The ECB said, “We are confident that this programme will contribute
to ensuring the stability of the Irish banking system and permit it to
perform its role in the functioning of the economy.”

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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