Irish bailout format a 'mistake'

Mon, Jun 11, 2012, 01:00

An adviser to former minister for finance Brian Lenihan has said the format of the bailout deal for the Irish banks was a mistake, which is being repeated again in the rescue package for Spain.

Alan Ahearne of NUI Galway said funds should have been injected directly into the Irish banks rather than given to the State.

He said the Spanish rescue deal is very similar to Ireland’s, in that the government has borrowed money to recapitalise its viable banks, but unlike Ireland, the Spanish have opted not to apply for a second round of funding to finance the state’s budget deficit.

Dr Ahearne said at current interest rates Spain would not be able to borrow from the markets. “They are crossing their fingers and hoping that something improves, that sentiment changes over the next few weeks and months,” he said.

Dr Ahearne compared the Spanish situation with Ireland in autumn 2010 when borrowing costs soared. He said investors had been reluctant to invest in Irish sovereign bonds because the Irish State was linked to the banking system, whose debt could not be quantified.

“These investors don’t like buying risks in banks,” he said. “Spain has exactly the same issue now.”

Dr Ahearne said if Spain had negotiated better terms than Ireland, the Government would have been able to renegotiate its deal with the EU-IMF.

“If Spain had been able to have injections directly from European funds into its banks then Ireland would have said 'that would have to be applied retrospectively to Ireland',” he said.

“It looks, at least for the time being, like that is not going to happen, unless Germany and the other European leaders are forced to reverse what they did in Spain, but that seems unlikely,” he told RTÉ’s Morning Ireland.