After weeks of denying it needed a bailout, Ireland became the second European country to ask for a multibillion euro emergency loan to help stabilize its debt-ridden banks Monday while the U.K. pledged support for the bailout, saying a stable Irish banking system is in its best interests.
The government's critics in the Irish Parliament had called Monday for the Parliament to be dissolved in the wake of the multibillion-dollar bailout that started to take shape over the weekend.
But a little after 7 p.m. local time, Irish Prime Minister Brian Cowen said in a televised address that his government would do no such thing and that he would remain in power while the bailout process unfolds.
“The electorate will not be served by delaying the steps necessary to ensure our survival,” Cowen said.
By law, Ireland must have a general election at some point in 2011.
Cowen said the government was on track to present its budget on Dec. 7. The dissolution of Parliament and subsequent general election would come “at the conclusion of the budget process,” at the earliest, Cowen said. That likely means some time early in the new year.
Bailout could be as much as 1B euro
Details of the bailout were still emerging Monday, but Irish Finance Minister Brian Lenihan said the country's banks would be pruned, merged or sold as part of a massive EU-IMF bailout, which could be worth as much as 100 billion euro ($139 billion Cdn).
Lenihan said Ireland's banks have become wholly dependent on loans from the European Central Bank and appear likely to be frozen out of normal credit markets for at least a year.
He stressed that Ireland has no plans to force senior bondholders of its five state-supported banks to absorb losses, as German Chancellor Angela Merkel said will eventually start to happen when the EU's new crisis-management rules are enacted in 2013.
The minister also stressed that the measures are necessary to prevent the collapse of the country's banking system.
“I believe it is important that this state continues to fund itself in a stable way; that economic continuity is preserved; that there is no danger to the borrowing which the state requires to make in its own interest; and also, and above all … that our banking system is stabilized,” Lenihan said.
Lenihan reiterated that the loan — requested Sunday after weeks of Irish denials that it needed any aid — won't exceed 100 billion euro. But he said the headline figure would become clear only after another week or two of negotiations in Dublin involving experts from the Washington-based International Monetary Fund, the Brussels-based European Commission and the Frankfurt-based ECB.
Foreign assets to be 'discarded'
Ireland's finance chief said he agreed with European colleagues that the Dublin banks — which borrowed money aggressively and pumped it into runaway Irish, British and American property markets for a decade — needed to be cut down to size and refocused purely on supporting Irish savers, home owners and businesses. Most of their remaining foreign assets “will have to be discarded,” he said.
“Because of the huge risks they [Irish banks] took earlier this decade, they became a huge risk not only to this state but to the euro zone as a whole,” he said.
Ireland has faced intense pressure in recent weeks to raise its corporate tax rate — the lowest in the euro zone — to much higher than its current 12.5 per cent level. But Lenihan insisted Monday that such a tax hike is not a condition of the bailout terms.
Google has used Ireland's favourable tax regime to reduce its tax bill by more than $3.1 billion US in the last three years. Hewlett-Packard Inc. was one of several firms to warn Ireland that a tax hike would be ill-advised.
“HP is very clear, if the tax rate increased we would be relooking at our investment in Ireland,” the head of HP's Irish operations Lionel Alexander told Bloomberg. “One of the key reasons we came to Ireland was for the 12.5 per cent tax rate, and we think that should stand as part of these negotiations.”
The loan application helped boost the major European markets and currencies which all climbed higher Monday as investors breathed a temporary sigh of relief.
The FTSE 100 index of leading British shares, Germany's DAX, and CAC-40 in France were all higher, meanwhile Wall Street was poised for a solid advance at the open later.
“There is understandable relief in the financial markets this morning but that will not last,” said Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ.
“Even assuming the best-case scenario of no further bailouts, the necessary adjustments required to rectify internal imbalances in the euro zone are deeply deflationary and will quickly become evident by the underperformance of the euro-zone economy,” Halpenny added.
Ireland's finance minister: 'we're not bust'
EU foreign ministers gathering for their monthly Brussels meeting said they had no real choice but to help Ireland stabilize its banks and cope with its mounting debts because, just like Greece in May, the 16-nation euro zone cannot allow one of its members to default.
“We are all in a very difficult financial situation,” said Finnish Foreign Minister Alexander Stubb. “We are in this boat together and we will find a solution to this crisis together. And the reason is very simple — we cannot afford to leave one single country alone.”
Lenihan said Ireland still has more than 20 billion euro in cash reserves and hopes it can emulate South Korea, which received an IMF bailout in 1997 and returned to borrowing from open markets a year later.
“We're not bust. We have substantial cash reserves and the EU recognize that,” he told Irish state broadcasters RTE. He emphasized that Ireland hoped to keep as much of the EU-IMF loans on deposit as possible, because that could encourage normal lending at lower rates to resume sooner rather than later.
The IMF-EU fund taking shape would “demonstrate that Ireland has facilities available to it to enable it to go to the market … that Ireland has a last resort,” he said.
Even so, Ireland's Green Party, the junior partner in its coalition government, said Monday it believed a general election should be held early in January after a series of fiscal plans and the 2011 budget had been produced and passed, Reuters reported.