MercoPress. South Atlantic News Agency

Emergency loans to Ireland total 85 b Euros, conditioned to draconian budget cuts

Bank of Ireland and Allied Irish Banks, almost nationalized

EU and IMF have extended 85bn Euros of emergency loans to the Republic of Ireland, according to reports on Irish state television. The widely anticipated bail-out package comes after a day of sharp falls in global share prices and the Euro.

Markets are concerned that despite the rescue package, the debt crisis could spread to other European countries. Dublin is also expected to publish a four-year austerity plan on Wednesday amid fears the government could fall.

The rescue package would see the level of capital in the Irish banks being increased from 8% to 12%, according to Irish state broadcaster RTE, in “a move to bolster confidence of depositors in the financial system”.

It follows a long-running flight of wholesale depositors from the Irish banks, leaving them dependent on the European Central Bank for financing. The new capital will provide the banks with a bigger cushion against losses.

But it will mean the government all-but nationalising Bank of Ireland and Allied Irish Banks, as the government is likely to inject the money by buying new shares in them.

The government expects to end up with a majority ownership of Bank of Ireland, according to a report in the Financial Times. It follows comments from the head of Ireland's central bank, Patrick Honohan, that the banks would effectively be “up for sale” by the government.

However uncertainty surrounds where the budget cuts will come from to pay for the estimated 85b Euro rescue package. The four-year plan to be revealed on Wednesday is a precondition for the financing.

It will provide some detail of spending cuts and tax rises amounting to 15bn Euros, including a hefty 6bn Euros next year, with the aim of bringing the government's budget deficit down to a target of 3% of GDP by 2014.

Some hints of the plan's contents have been provided by an IMF report on European economic reform. The IMF recommends that Ireland should gradually cut unemployment benefits the longer a person is out of work. It also said the country should review its minimum wage - one of the highest in the Euro zone - to bring it in to line with the general fall in wage levels.