Worthy News: Irish resisting bail-out pressure

Monday 15 November 2010

Irish resisting bail-out pressure

There are concerns about the impact of budget cuts on the Irish economy

The Irish Republic has insisted it does not need assistance from the European Union amid speculation it is under pressure to use the EU bail-out fund.

Reports suggest the Irish government may approach the European Financial Stability Fund (EFSF) for up to 80bn euros (£68bn; $110bn).

But Dublin said such reports were "fiction".

Irish difficulties are set to be discussed at a meeting of EU finance ministers in Brussels on Tuesday.

However, the BBC's Europe editor Gavin Hewitt said that high-level talks had already begun, involving European Commission President Jose Manuel Barroso and his economy commissioner Olli Rehn.

"Some EU officials believe it would be better for the Republic to accept a bail-out package now rather than to allow uncertainty to continue," Gavin Hewitt said.

"Brussels fears any delay risks repeating the Greek crisis that earlier this year threatened the entire eurozone."

Irish bond prices were little changed in early trading on Monday.

Yields have soared as investors have been looking to offload Irish debt in recent weeks, and there are market concerns that if the EU does not intervene in Irish troubles, there could be contagion elsewhere in the eurozone.

“The Irish economy is in desperate straits. No one disputes that ”

Read Gavin's blog

Last week, anxiety over the Irish Republic spread quickly to other heavily indebted eurozone nations including Portugal and Spain, driving up their borrowing costs.

And the shares of banks, including Royal Bank of Scotland, which have exposure to Irish government debt have fallen in the past week.

A spokesman for the Irish finance department said the country was "fully funded till well into 2011".

Meanwhile trade and business minister Batt O'Keefe said the Republic must show it could "stand alone".

"It's been a very hard-won sovereignty for this country and this government is not going to give over that sovereignty to anyone."

However, Jim Power, chief economist at Friends First, said that "the reality is Ireland is now becoming a serious source of instability in the eurozone".

"At the EU level, there will be a huge imperative to try and stabilise this thorn in the side and one way of doing that would be to force Ireland to access the EU fund," Mr Power added.

Under procedures agreed in May, a eurozone country has to ask for help in order to trigger a bail-out.

"Unfortunately, for those hoping to either prevent contagion - or to push through new rules regarding the crisis-resolution mechanism -, Ireland has shown little interest so far in asking for assistance," said analysts at BNY Mellon.

Since 2008, the Irish Republic has suffered the worst property collapse of all developed economies, with house values falling between 50% and 60%.

The Irish government has also all but nationalised the country's banking system, which had lent recklessly at an estimated cost of 40bn to 50bn euros, according to BBC business reporter Joe Lynam.

The country has promised the EU it will bring its underlying deficit down from 12% of economic output to 3% by 2014. Its current deficit is an unprecedented 32% of gross domestic product, if the cost of bad debts in the Irish banking system is included.

The Irish government, which has a flimsy majority in parliament, is set to publish another draconian budget on 7 December, which will make spending cuts or tax rises totalling 6bn euros, and aims to bring the deficit down to between 9.5-9.75% next year.

Investors fear the budget cuts are likely to worsen the country's already deep recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

That parliamentary majority is likely to be cut to only two on 25 November, when a by-election will be held that the governing Fianna Fail party is likely to lose.

The government had left the Donegal South West seat empty for 17 months but the Republic's second-highest court recently ruled that the delay was unreasonable. Three other by-elections are also required.

This article is from the BBC News website. � British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.