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Relief for Euro and bonds as Ireland € 95 billion rescue package is announced

Monday, November 22nd 2010 - 18:01 UTC
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Irish Prime Minister Brian Cowen Irish Prime Minister Brian Cowen

Ireland became the second Euro country to seek a rescue as the cost of saving its banks threatened a rerun of the Greek debt crisis that destabilized the currency. The Euro rose and European bond risk fell Monday following the announcement of the package.

However the package that Goldman Sachs Group Inc. estimates may total 95 billion Euros failed to damp speculation that Portugal and Spain would need to tap the emergency fund set up by the European Union and International Monetary Fund after the Greece rescue.

“Speculative actions against Portugal and Spain are not justified, though it can’t be excluded,” Luxembourg Prime Minister Jean-Claude Juncker admitted Monday on RTL Luxembourg radio. “In a moment where financial markets have an excessive tendency to punish those countries that didn’t stick 100 percent to an orthodox consolidation, one can never exclude that similar things will happen.”

The aid, which Irish officials said as recently as Nov. 15 they didn’t need, marks the latest blow to an economy that more than doubled in the decade ending in 2006. The bursting of the real-estate bubble in 2008 plunged the country into a recession and brought its banks close to collapse. With Irish bond yields near a record high, policy makers are trying to keep the crisis from spreading.

“Clearly because of the size of their loan books, the huge risks they took, they became a threat not only to the state but to the” entire Euro region, Lenihan told Dublin-based RTE radio in an interview. “The banks will be downsized to the real needs of the Irish economy” to “Irish consumers and Irish businesses. That has to be the primary focus of Irish banks.”

Ireland is expected to channel some aid to lenders via a “contingent” capital fund, Finance Minister Brian Lenihan said.

Meantime the Euro rose in money markets and Irish 10-year notes rose, sending the yield down 24 basis points to 8.11%. Ireland led a decline in the cost of insuring against default on European debt, according to traders of credit-default swaps.

“Ireland had no choice,” said Nicholas Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for money managers. “The market will still be waiting for the details of the assistance and the conditionality, but there should be a relief rally.”

The U.K. and Sweden may contribute bilateral loans, the EU said in a statement. Lenihan declined to say how big the package will be, saying that it will be less than 100 billion Euros. Goldman Sachs Chief European Economist Erik Nielsen said Ireland needs 65 billion to fund government for the next three years and 30 billion for banks.

Talks will focus on the government’s deficit cutting plans and restructuring the banking system, the EU said in a statement. Irish Prime Minister Brian Cowen, who spoke at the same press briefing as Lenihan, said the banks will be stress tested. Ireland nationalized Anglo Irish Bank Corp. in 2009 and is preparing to take a majority stake in Allied Irish Banks Plc, the second-largest bank.

Lenihan and Cowen appeared minutes after finance chiefs issued a statement endorsing an aid request to calm markets. Allied Irish emphasized the fragility of the system on Nov. 19, reporting a 17% decline in deposits this year.

Cowen plans to announce the government’s four-year budget plan this week and said an agreement with the EU and the IMF will come “in the next few weeks.” Cowen also faces an election in Donegal in northwest Ireland on Nov. 25 to fill a vacant parliamentary seat. The vote threatens to erode Cowen’s majority. He has the support of 82 lawmakers, including independents, compared with 79 for the combined opposition.

The bailout follows two years of budget cuts that failed to restore market confidence as the cost of shoring up the financial industry soared.

Lenihan cancelled bond auctions for October and November and announced 6 billion euros of austerity measures for 2011 on Nov. 4 in a bid to restore investor confidence. Those efforts failed after German Chancellor Angela Merkel triggered an investor exodus by saying bondholders should foot some of the bill in any future bailout.

The ISEQ stock index has plunged 70 percent from its record in 2007.

Categories: Economy, International.

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