European Union and International Monetary Fund experts will start scanning the books of Ireland’s debt-laden banks tomorrow in Dublin in a prelude to a possible aid package to stem Europe’s widening fiscal crisis.
Finance chiefs from the 16-country euro area said the joint assessment will determine whether Ireland can patch up the banking system on its own or needs to fall back on the EU-IMF ¤750-billion ($1 trillion) rescue fund.
“If banking problems are too big for this small country to manage, Europe has made it clear they’ll help,” Irish Finance Minister Brian Lenihan told state broadcaster RTE today as meetings of European finance ministers wrapped up in Brussels.
As Europe struggled to present a united front to maintain its fiscal credibility, Britain said it would back support for Ireland, abandoning a hands-off policy toward the euro region to prevent Irish bank woes from spilling over into the UK market.
In a blow to Ireland, LCH Clearnet Ltd raised the margin requirement for Irish bond trading to 30 per cent of net positions, making it more expensive to buy Irish securities.
Irish bonds slipped for a second day, pushing the 10-year yield up 5 basis points to 8.51 per cent. The extra yield over German bunds rose 6 basis points to 567 basis points. The spread, a measure of the risk of investing in Ireland, peaked at 646 basis points on November 11.
The Dublin consultations with the ECB, European Commission and IMF will “see if the state is able to cover the needs of the banking sector,” Belgian Finance Minister Didier Reynders told reporters today. “If that’s not the case, there will probably have to be a European intervention.”
‘Days’ away
Such a package could come together quickly, the officials said. “Is it six months or a few days away? I’d say it’s closer to days,” French Finance Minister Christine Lagarde said.
Ministers refused to speculate about Ireland’s financial needs, estimated by Barclays Capital at about ¤80 billion. Klaus Regling, manager of the rescue facility, said the EU could raise the money in five to eight working days.
Britain, which didn’t contribute to the 860 billion euros in loans and pledges in the wake of the Greek crisis, “stands ready to support Ireland,” UK Chancellor of the Exchequer George Osborne said today in Brussels.
Ireland’s five-member ISEQ Financial Index of banking stocks is now worth 2 per cent 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 budget
To boost confidence, Lenihan may release the 2011 budget before a planned December 7 publication date and will unveil a four- year deficit-cutting plan next week.
Steps already taken to salvage Ireland’s banking system, which is increasingly reliant on ECB funding, will billow the deficit to 32 per cent of gross domestic product in 2010. That’s a record in the 12-year history of the euro and more than 10 times the bloc’s 3 per cent limit.
Investors watched the EU’s handling of Ireland for clues to the fate of Portugal and Spain, two other countries forced by the EU to impose spending cuts to rein in excessive deficits.
A declaration released late yesterday mirrored a Feb. 11 show of support for Greece, which ushered in three months of politicking -- centered on Germany’s reluctance to part with taxpayer money -- before the bloc crafted a 110 billion-euro rescue formula.
Greek Payment
Greece and the EU commission disputed an Austrian claim that the European share of the next 9 billion-euro disbursement will be delayed to January. The January payout was in the original schedule, EU spokesman Amadeu Altafaj said. The Greek Finance Ministry said the timing “poses no cashflow problems.”
German demands prompted the latest phase in the crisis, when EU leaders on Oct. 29 agreed to consider German Chancellor Angela Merkel’s demand for a crisis-resolution mechanism that forces bondholders to share the cost of future bailouts.
That pledge triggered 13 straight days of losses in the Irish bond market and dragged down Portuguese, Greek and Spanish securities. To stem the damage, Merkel on Nov. 12 signed up to a five-country declaration that exempts bonds now on the market from a restructuring that could be imposed under a permanent system to be created by 2013.
Merkel wants to penalize bondholders for betting against fiscally unsound governments after the EU’s temporary rescue fund runs out in 2013. In Paris on Nov. 15, Greek Prime Minister George Papandreou blamed her for creating a “self-fulfilling prophecy” that hurt peripheral countries.
The Greek criticism drew a German rebuke yesterday. “When I heard the comments by the Greek prime minister I thought, with all due respect, that Greece has enjoyed a lot of European and German solidarity,” German Finance Minister Wolfgang Schaeuble said in Brussels. “But solidarity is not a one-way street. That shouldn’t be forgotten in Greece.”
