November 15, 2010 / 7:45 AM / 7 years ago

Ireland signals banks, not state, may need help

<p>A beggar sits on O'Connell Bridge in the centre of Dublin, Ireland October 2, 2010.Cathal McNaughton</p>

DUBLIN (Reuters) - Ireland signaled on Monday its banks, not the state, could need help with funding but its impatient euro zone partners urged a swift decision on any EU rescue, saying the uncertainty was rattling markets and hurting them.

Irish Prime Minister Brian Cowen, whose parliamentary majority is on a knife-edge as he wrestles with the worst economic crisis in a generation, said high borrowing costs were making it hard for banks to support an economic recovery.

European finance officials would discuss funding costs and other issues at a meeting on Tuesday, said Cowan, who repeated Ireland had not applied for funding to help finance the state, whose debt was funded until mid-2011.

"(We have to discuss) how best to underpin financial and banking stability within the euro area," he told national broadcaster RTE.

"Having that kind of cost of money...as an ongoing basis if it were to become a norm would make it difficult for banks to function as engines of recovery," he said.

Ireland's borrowing costs shot to record highs in the past week on concerns a mammoth bill for bailing out its banks could rise further. That combined with growing borrowing costs to trigger fears of a Greek-style scenario where budget problems in one country plunge the entire euro zone into crisis.

Cowen has been reluctant to seek help on Ireland's sovereign debt, apparently hoping passage of a 2011 austerity budget early next month will avoid the need for a bailout.

His government faces a by-election it can ill afford to lose on November 25 and wants to preserve its sovereignty, including a low corporation tax which is a key plank of Ireland's economic strategy.

However, countries on the euro zone's periphery are growing impatient as their borrowing costs have spiraled as a result of Ireland's troubles.

Bank of Spain Governor Miguel Angel Fernandez Ordonez, a member of the ECB's governing council, told a banking conference in Madrid Dublin's indecision had increased jitters on financial markets.

"The situation in the markets has been negative due in some part to the lack of a decision by Ireland. It's not up to me to make a decision on Ireland, it's Ireland that should take the decision at the right moment."

Ewald Nowotny, another ECB governing council member, said in a radio interview the EU wanted a "quick, good solution to Ireland, so that there will be no spill-over" to other heavily indebted countries such as Portugal and Spain.

Portuguese Finance Minister Fernando Teixeira dos Santos said Ireland had to consider the entire euro zone's needs.

"I want to believe they will decide to do what is most appropriate together for Ireland and the euro. I want to believe they have the vision to take the right decision," the Wall Street Journal quoted him as saying.

A senior member of the European Central Bank confirmed discussions were under way with Dublin and said that aid, if requested, would be available for Ireland's banks or for the state itself.

There was some market speculation that euro zone finance ministers could announce some form of support after Tuesday's meeting. That helped peripheral euro zone debt yields outperform safe-haven German debt on Monday, as belief grew among investors that Ireland was edging closer to seeking EU aid.

Irish 10-year bond yields remained at historically high levels but fell to 8.15 percent, down around 30 basis points on the day.

But Eurogroup chairman Jean Claude-Juncker said Ireland had not requested aid and that a deal was not imminent.

"The Irish think that they can keep the problems they're facing under control," he told news agency Bloomberg. "They are not near the point where they would ask for external help."

"Irish Contagion"

European Central Bank Vice President Vitor Constancio said Ireland had been talking to European institutions but there had not yet been a formal request for assistance.

"The Irish state is financed until part of next year, but it is also a problem of the banks that are at the center of the problems in Ireland and considerations have to be pondered," he told a news conference in Vienna.

Constancio said such help, if needed, could involve the 440 billion euro European Financial Stability Facility (EFSF) set up after Greece was forced to seek help in May.

EU sources say aid under discussion ranges from 45 billion to 90 billion euros ($63 billion-$123 billion), depending on whether Ireland needs support for its banks.

Teixeira dos Santos told Reuters Portugal was being affected by "contagion from the situation in Ireland" but Lisbon did not have the same problems with its banks that faced Ireland.

Lisbon had no plans to request emergency foreign funding after the Financial Times quoted him as saying there was a high risk Lisbon would have to seek aid.

"Such a request is not imminent, there are no contacts, be it formal or informal," he told Reuters. "The rest are rumors and speculation."

Ireland and others say Germany has aggravated problems by pushing the idea of asset value reductions or "haircuts" for private bondholders under a permanent euro zone rescue mechanism which Berlin wants in place from 2013.

Greek Prime Minister George Papandreou said Berlin's demand that banks and bond markets share the pain of a sovereign debt default could push some euro zone economies toward bankruptcy.

"It created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal," Papandreou said during a visit to Paris.

"This could create a self-fulfilling prophecy ... This could break backs. This could force economies toward bankruptcy."

Additional reporting by Vienna, Athens, London and Lisbon bureaux; writing by Jon Boyle

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