State will take EU/IMF aid if bank problems 'too big'

Minister for Finance Brian Lenihan said the Government will accept European Union support if the banking crisis is too big for Ireland to fix on its own.

Speaking on RTÉ radio this morning, Mr Lenihan said it would work with its EU partners to address structural problems in the Irish banking system, but he refused to set a deadline for the end of talks, which are set to begin tomorrow.

He said a "short focused consultation" with officials from the European Central Bank (ECB), EC, and International Monetary Fund (IMF) would start in Dublin tomorrow.

He said Europe stood "shoulder to shoulder" with Ireland and that the ECB was "fully behind" the Irish banking system.

"Despite a large range of measures adopted by the Government, Ireland is a small country, and if the banking problems in the country are too big for this small country to manage, Europe is making it clear that they will help and help in every possible way to secure the system," Mr Lenihan said.

The Minister said the ECB was standing "fully behind" the Irish banking system and said there was no funding problem for the Irish banking system, adding: "There is no need to have any concerns over safety of banking deposits."

Mr Lenihan refused to be drawn into any detail over cost of any bailout package, and he defended the bank guarantee, saying the Government's action had been backed by Europe's finance ministers.

He said the reality was that without the bank guarantee, the State would not have a banking system, and consequently a huge loss of jobs, credit and enterprises. "The guarantee shored up the system for a while, but of itself it has not been sufficient," Mr Lenihan said.

The Minister said the Government was considering the four-year budgetary plan this week and would publish it before the end of the month, adding the budget will go ahead as scheduled on December 7th.

Mr Lenihan also defended the State's corporation tax rate. He said the issue was not a matter that arose for the EU and was fundamental to Ireland's growth prospects.

German finance minister Wolfgang Schaeuble today said the European Union is "ready to act" to help Ireland.

"We are ready to act in any case," Mr Schaeuble told reporters today in Brussels as he arrived for a meeting of EU finance ministers. "Ireland has shown itself to be very responsible over the last two years in the crisis and able to act and that's why Ireland doesn't need the counsel of other governments.

"If everyone sticks to what we discussed together, we will best fight the wrong speculations in the markets."

Estonia's finance minister Jurgen Ligi said Ireland needs more budget austerity to solve its debt problems.

The European Central Bank has "a central role" in helping Ireland to resolve its banking crisis, Mr Ligi told Bloomberg Television today. ECB assistance "can't be very long and unconditional," he said. "They have their conditions for politicians as well."

Estonia on January 1st will become the third east European nation to adopt the euro, following Slovenia and Slovakia. The government raised the value-added tax, alcohol and fuel taxes and cut budget spending, with measures totaling 9 per cent of gross domestic product last year, to keep the fiscal deficit below the European Union limit of 3 per cent of output in 2009.

The budget measures further dented domestic demand that started declining in 2008 as a property bubble burst. The economy contracted 5.1 per cent that year and 13.9 per cent in 2009.

"We have big similarities with Ireland in economic structure," Mr Ligi said. "We had a really hard real-estate boom and crisis after that, but we started to consolidate very early and this is the first thing that has to be asked from Ireland."

The decision to proceed with preparations for an EU/IMF plan for Ireland was taken during a three-hour meeting at which Mr Lenihan said he had no mandate from the Government to negotiate a bailout.

It comes against the backdrop of mounting anxiety in the European Central Bank (ECB) that the banks' increasing reliance on exceptional support and concern that the 45 billion bailout bill might have to increase.

"The ECB has stood loyally behind the Irish banking system and continues to do so. Those who have deposits or funds in the Irish banks can be quite secure as part of the euro zone that we are guaranteed the stability and support of the ECB," Mr Lenihan said.

The terms of reference for the talks, read out last night by euro group president Jean-Claude Juncker, say engagement will determine the "best way" to provide any support required to address market risks especially in the banking sector.

"Market conditions have not normalised and pressures remain, giving rise to concerns that further reforms and stabilisation measures may be appropriate," said Mr Juncker, who is Luxembourg's prime minister.

Mr Juncker said he expected "within the coming days" a definitive decision on whether Ireland would seek a bailout.

Mr Lenihan, who arrived more than an hour late to the meeting due to fog, has been arguing that the Government can find a way of resolving the banking crisis without triggering a fiscal rescue.

Diplomatic and other sources say, however, that ECB chief Jean-Claude Trichet has been pressing for a decisive response to deterioration in the position of the Irish banks.

Mr Lenihan said that Ireland's EU partners understood that corporate taxation is not under discussion. When asked if he had any concerns about a possible erosion of Irish sovereignty, the Minister said: "When you borrow, you lose a little bit of your sovereignty, no matter who you borrow from."

He added that he saw sovereignty in a European context, given Ireland's membership of the euro.

Meanwhile LCH Clearnet doubled the extra margin requirement it charges for Irish bond trading to 30 per cent of net positions. The increase will be based on outstanding positions at the close of business tomorrow and reflected in a so-called margin call on November 19th, LCH Clearnet said in a statement on its website today.

The change applies to Irish government bond repurchase agreements cleared through its RepoClear service, it said.

Clearing houses such as LCH guarantee investors' trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

LCH boosted the margin requirement after the yield on Irish 10-year government bonds stayed "consistently" at more than 500 basis points above a AAA benchmark, it said.

"We are not making any judgment on Irish creditworthiness, this decision is based solely on government bond-spread data," John Burke, head of fixed income at LCH, said today in an interview. There is no limit to potential extra margin charge, and while the company will continue to monitor the market, there are no current plans to increase it further, he said.

Credit-default swaps on Ireland climbed 18 basis points to 537.5, according to data provider CMA. Contracts on Greece increased 10 basis points to 938, Portugal rose 7 to 429, Italy was 3 higher at 188.75 and Spain was up 4.5 at 261.5.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments was unchanged at 168.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements

The euro traded near a seven-week low against the dollar amid concern a failure to craft a rescue package would allow Ireland's banking crisis to spread to other member states of the common currency.

The euro was at $1.3487 as of 8.01am from $1.3489 in New York yesterday, when it touched $1.3448, the weakest level since September 28th. The shared currency traded at 112.55 yen from 112.38 yen after dropping 0.4 per cent yesterday.

"Concerns about the region's debt crisis weigh on the euro," said Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. "That's given the dollar a boost, and the euro stays under pressure. Ireland's problem is not so much a sovereign issue as a banking issue."

[Source: Irish Time, Dublin, 17Nov10]

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