Belfast Telegraph

Saturday 25 October 2014

EU backs Irish government into corner on bailout

The Irish Government is edging towards accepting a multi-billion euro bailout for the banks following intense pressure from the European Union to sort out finances.

To fend off being forced into a bailout for the entire State, Finance Minister Brian Lenihan is poised to agree to a bank injection to stabilise the euro and calm markets.

Following pressure from the European Central Bank (ECB), Taoiseach Brian Cowen last night indicated the Government would accept a huge injection of cash for the banks only.

Mr Lenihan will approach today's crucial meeting of EU finance ministers seeking to avoid being forced into a public finance bailout -- which would carry tough conditions -- but is willing to accept money for the banks.

The Republic's Government will portray its acceptance of funds as an effort to stabilise the euro.

But there are concerns about the implications and terms attached to accepting a bank bailout, according to a source familiar with the process.

It follows disclosure that the Irish Central bank had pumped 20bn euro of funding into the banks in recent months.

The ECB is hoping the cash injection will stabilise markets, take pressure off the eurozone and give the banks a better footing in which to operate so they can lessen their dependence on ECB loans.

European Central Bank Vice President Vitor Constancio said yesterday that Ireland would be able to tap the fund to save its banks. Fellow central bank council member Miguel Angel Fernandez Ordonez said the nation should make a "final decision" on an aid plan.

The proposed bailout of the banks could lead to the complete nationalisation of the country's two largest banks.

AIB is already facing 90pc state control, while it would take only 600m euro of fresh capital to put Bank of Ireland into majority state ownership.

Irish Life and Permanent would also be majority owned, with only modest additional cash injections from the State.

Although the Government still insists it is not applying for funding, Mr Cowen appeared to accept a deal would have to be struck as he said the Republic of Ireland would see "in what way can we bring stability into the markets".

Mr Cowen's comments came after a day of intense behind-the-scenes activity in Dublin and Brussels.

Concerned depositors were reassured that their money in the banks was safe. But the ECB said Irish banks were facing further losses, as it said "clear" decisions were needed soon to prevent the crisis from affecting other countries.

German Chancellor Angela Merkel raised the spectre of the euro collapsing as she warned: "If the euro fails, then Europe fails."

Today Mr Lenihan will face a grilling from his fellow finance ministers in Brussels. He will find himself attempting to avoid being forced into a wholesale bailout for the country.

Senior sources at Irish banks last night said they had "no idea" what kind of support any bailout could take since they had not been asked for their views. Banks that could find themselves in majority state ownership as a result of any fresh bailout could take a legal challenge against the move.

"It's hard for me to say if I'm going to challenge something I don't know about yet," a senior banker said last night.

The Government is also planning to publish its four-year budgetary plan early next week -- but Budget day looks likely to remain December 7.

The possibility of bringing forward the Budget by a week to boost investor confidence is also under consideration.

But a coalition source said November's taxation and spending figures would be required for the Budget, meaning Thursday, December 2, would be the earliest possible date.

Economic experts in Germany say their government "wants to end the market turmoil, which has been bad for the markets and also for Chancellor Merkel's domestic image".

Political economist Henrik Enderlein said the Germans now realised they made a huge mistake talking about bondholders taking a hit when countries cannot pay their debts.

Chancellor Merkel's bid to penalise bondholders for betting against fiscally unsound governments prompted objections from ECB president Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker, who chairs today's meeting in Brussels. But Mr Juncker said he did not expect an agreement with the Republic at today's meeting.

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