Ireland concedes it is in line for massive bailout

City A.M. Reporter
Ireland's central bank chief said he expected the country to receive tens of billions of euros in loans from European partners and the IMF to help shore up its shattered banks and stabilise the economy.

Central bank governor Patrick Honohan was speaking shortly before the start of talks with a joint mission of the European Commission, the European Central Bank and the International Monetary Fund on a possible rescue package.

"The intention is and the expectation is, on their part and personally on my part, that negotiations or discussions will be effective and a loan will be made available and drawn down as necessary," he told state broadcaster RTE.

"We're talking about a very substantial loan for sure – tens of billions, yes," Honohan said, acknowledging that there had been substantial outflows of funds from the Irish banking sector since April.

After 10 days of losses, European stock and bond markets and the euro recovered slightly on expectations that Ireland would become the second euro zone country after Greece to receive a bailout to cope with high debts and deficits.

Dublin's borrowing costs have gone through the roof since late October as concerns about the banks' swelling liabilities and German-driven EU moves to create a system for restructuring stricken euro zone states' debts unsettled investors.

"To some extent the market is anticipating (a bailout), but once the announcement is made I think we will see these spreads come in," said Nick Stamenkovic, a bond market strategist at RIA Capital Markets in Edinburgh.

EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

In an indication of potentially tough negotiations ahead, France said Ireland may have to raise its ultra-low 12.5 per cent corporation tax rate – a taboo in Irish politics – in return for the assistance package.

French Finance Minister Christine Lagarde said Irish business taxation was abnormally low by European standards, while income taxes were broadly in line with the EU average.

"So we will have to see how these (corporate) rates can be changed without weighing down the Irish economy and driving away investors," she told France-Inter radio.

Higher-tax countries, including Britain, Germany and France, have long seen the Irish rate as a form of unfair competition.

Irish Prime Minister Brian Cowen has repeatedly rejected suggestions that his government is discussing a bailout that would place public finances under EU-IMF supervision.

Finance Minister Brian Lenihan insisted on Wednesday after talks with EU peers that the Irish corporate tax was "safe."