Irish application for IMF/EU rescue package approved

Sun, Nov 21, 2010, 00:00

Taoiseach Brian Cowen tonight confirmed the European Union has approved a formal Government request for financial aid package from the European Union and the International Monetary Fund.

European finance ministers held an emergency conference call tonight to consider the request for aid, which was submitted following a Cabinet meeting in Dublin. 

Speaking at a press conference in Government Buildings in Dublin with Minister for Finance Brian Lenihan tonight, Mr Cowen said the European authorities have agreed to the request. "I expect that agreement to be finalised shortly, within the next few weeks," he added.

He said the rescue package, which will run for three years, will be tied to a restructuring of the banks and a deficit reduction plan.

The amount of funding being applied for will be decided during the negotiations, the Taoiseach said.

A senior EU source said he expected to final amount to be as much as €90 billion, adding that this
sum would include money to support the Irish banking sector.

Earlier today, Mr Lenihan said the figure would be in the "tens of billions" but would be less than €100 billion.

Mr Cowen also said Ireland's 12.5 per cent corporation tax rate did not form part of the negotiations.

“A central element of the programme will also be to support further deep restructuring and the restoration of the long term viability and financial health of the Irish banking system,” Mr Cowen said.

The loan will be arranged through the IMF and the European Financial Stability Facility, a €440 million fund that can be accessed by EU member states in financial difficulty. Mr Lenihan said the UK and Sweden have also offered to help fund the package.

The Taoiseach said the Government will publish its four-year recovery plan for the economy early next week.  The 160-page document charts how the State will reduce its outgoings by €15 billion between now and the end of 2014.

In Brussels, EU economic and monetary affairs commissioner Olli Rehn said the finance ministers welcomed the Government’s request for aid. "Providing assistance to Ireland is warranted to safeguard the financial stability in Europe," he said.

Mr Rehn said a team of European Commission, European Central Bank and IMF experts in Ireland would prepare the details of the assistance package by the end of the month, adding it would be a three-year loan programme. "The programme under preparation will address both the fiscal challenges of the Irish economy and the potential future capital needs of the banking sector in a decisive manner," Mr Rehn said.

The European Central Bank said the aid would be provided under "strong policy conditionality".

In a statement tonight, Central Bank Governor Patrick Honohan said tonight’s announcements allow Ireland’s course of economic and financial policy to be set on a more secure path. “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,” he said.

Labour Party finance spokeswoman said Joan Burton described the agreement as "the final epitaph for a Fianna Fáil Government that has plunged the country into the financial abyss and that has consistently and deliberately lied to the Irish people".

The Cabinet met this afternoon after Mr Lenihan said he would seek its approval for a financial bailout. Following several days of negotiations with IMF, EU and ECB officials in Dublin, Mr Lenihan said he would recommend the State applies for the bailout to ensure Irish banks had enough  "firepower" to function.

He dismissed pressure on Dublin from other euro zone countries to raise low business taxes that have attracted many multinational companies to Ireland, saying changes to the 12.5 per cent corporation tax rate were off the agenda and would hamper growth.

In an interview on RTÉ Radio’s News at One, Mr Lenihan declined to be drawn on the exact size of the loan but he indicated it would be in the tens of billions. He also said it would not be a “three figure sum”.

The Minister said the interest rate charged on the loan had yet to be agreed but would be significantly lower than the rate currently available to the Government on international bond markets.

Mr Lenihan admitted for the first time the banks had become too big a problem for the country to resolve on its own. “The key issue all the time for the Government is to ensure that we do not have a collapse of the banking sector."

He said Ireland may not fully draw down any funds it gets from the EU and IMF, which would simply serve as "a powerful demonstration of firepower behind the banks".

Experts estimated Ireland may need €45-€90 billion, depending on whether it needs help only for its banks or to cover general Government spending too. The main concern for EU policymakers is Ireland's problems spreading to other euro zone members with large budget deficits like Spain and Portugal, threatening a systemic crisis.

In May, the EU and IMF launched a €110 billion rescue package, the first of a euro zone country, aimed at pulling Greece back from the brink of bankruptcy. In return, Athens promised harsh austerity measures which brought large numbers of Greeks onto the streets in protest.

Yesterday, French president Nicolas Sarkozy predicted Ireland would raise its corporate tax rate but said he did not anticipate an increase would be made a condition of the international bailout. "It's obvious that when confronted with a situation like this, there are two levers to use: spending and revenues," Mr Sarkozy said.

German chancellor Angela Merkel declined to say whether she believed the tax was in jeopardy if the Government tapped an international bailout fund. "Every country that's in need of this mechanism can use it. Everything beyond that is the decision of each individual country," she said.

Meanwhile, Sweden said it would consider a bilateral loan to Ireland if one was requested, prime minister Fredrik Reinfeldt said. On the question of Ireland's low corporation tax, Mr Reinfeldt said: "It's a decision for the Irish people and government to take."

Additional reporting: Agencies