BRUSSELS/DUBLIN A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources said on Friday, but experts warned a rescue may not be enough to prevent contagion to other euro zone members.
Europe's single currency fell back late in the day and the risk premium investors demand to buy Irish debt instead of benchmark German bonds remained high as optimism about an aid deal was tempered by a sense the crisis is far from over.
A poll of participants at a high-level banking congress in Frankfurt showed nearly three quarters believe the turmoil that has shaken Europe's currency bloc for much of the past year would rage on even after an Irish rescue, ensnaring other financially weak countries like Portugal.
"As long as the fundamentals don't improve, the pressure will continue on other countries too," said Daniel Gros, head of the Center of European Policy Studies in Brussels. "Many believe the euro zone is just moving from one crisis to the next."
In Washington, U.S. Treasury Secretary Timothy Geithner disagreed. Asked in an interview on Bloomberg Television whether an aid package for Ireland from the EU and IMF could be the last bailout needed, he said: "I think that is absolutely possible."
"It is within the capacity of the Irish Government and the European authorities to achieve, and I believe they will achieve that because this government, Ireland, has demonstrated that they are willing to do some very, very difficult, very, very hard things to dig their way out of this mess," he said.
Ireland's central bank chief has acknowledged the country needs a loan running into the tens of billions of euros to shore up a fragile banking sector that has grown dependent on ECB funds and seen an exodus of deposits over the past six months.
Allied Irish, once the country's largest listed lender, announced that customer accounts had plunged by 13 billion euros so far this year and that mortgage book arrears had continued to rise in the third quarter.
AIB is relying on the Irish government to bail it out after years of loose lending to property developers left it with a gaping capital hole in excess of 10 billion euros.
"General funding market conditions in recent months have become increasingly challenging," the bank said in a statement.
Last week, larger rival Bank of Ireland signaled a 10 billion euro outflow of corporate deposits in the third quarter while bancassurer Irish Life & Permanent said it had suffered a 600 million outflow in the same period.
Unlike Bank of Ireland and Irish Life & Permanent, AIB did not indicate if the deposit withdrawal had tailed off.
The cost of supporting its ailing banks is forecast to push Ireland's deficit up to 32 percent of gross domestic product (GDP) this year, over ten times EU limits and by far the highest in the 16-nation currency zone.
Concerns about swelling bank liabilities and a German-led drive to create a system for restructuring stricken euro zone state debts has pushed Dublin's borrowing costs sharply higher since late October, forcing the government into rescue talks with European and IMF officials.
UNCLEAR ON AID AMOUNT
Irish community minister Pat Carey said the government would publish the details of a four-year fiscal plan to save 15 billion euros early next week. EU sources said the financial aid plan for Ireland would be presented at roughly the same time.
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.
The head of the euro zone's temporary fiscal safety net, from which funds could come, said aid could be raised in five to eight days if needed, notably from investors in Asia.
"We are confident that we can raise the necessary funds from institutional investors, central banks and sovereign funds, in Asia in particular," Klaus Regling, head of the European Financial Stability Facility, told French daily Le Monde.
Carey said it was impossible to say how much aid Ireland would need until a joint mission of the European Commission, European Central Bank and International Monetary Fund, which arrived in Dublin on Thursday, had a good look at the banks.
Banks in Ireland have been largely shut out of market lending due to concerns about their solvency. They are almost entirely reliant on funding from the ECB, which reached 130 billion euros by end-October.
Markets calmed in recent days after it became clear Ireland was on track to receive aid, but remained jittery on Friday.
The euro briefly pushed up above $1.3720, only to fall back to $1.3660 in late European trading. The spreads of Irish 10-year bonds above German benchmarks drifted down toward 5.4 percentage points before pushing back up to 5.6 points, dragging Greek, Portuguese and Spanish debt alongside.
Jonathan Loynes, chief European economist at Capital Economics, spoke of a "creeping concern" that problems on the European periphery would spread, possibly engulfing big economies like that of Spain.
BONE OF CONTENTION
There still remains a risk that aid talks could drag out if Dublin and the EU are unable to agree on the conditions attached to financial assistance.
Ireland's rock-bottom 12.5 percent corporation tax is shaping up as a major bone of contention, with euro zone neighbors pressing Ireland to raise it as part of any deal and Dublin resisting, arguing it is crucial for foreign investment.
The government, under severe pressure from the media and an emboldened opposition, faces a by-election next week which threatens to cut its razor-thin parliamentary majority.
Speaking at the opening of a new airport terminal on Friday, embattled Irish Prime Minister Brian Cowen vowed to get the "best possible outcome" for the Irish people in the talks.
(Reporting by Carmel Crimmins in Dublin, Paul Carrel, Eva Kuehnen and Josephine Cox in Frankfurt, Tim Ahmann in Washington)
(Writing by Noah Barkin; Editing by Mike Peacock)