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EU/IMF team heads to Ireland to explore crisis steps

DUBLIN/BRUSSELS (Reuters) - Ireland agreed on Wednesday to work with a European Union-IMF mission on urgent steps to shore up its shattered banking sector, a process that could lead to a bailout despite Dublin’s deep reluctance.

A team from the European Commission, the International Monetary Fund and European Central Bank will travel to Ireland on Thursday to examine what measures may be needed if Dublin decides to seek aid, euro zone finance ministers said.

Irish Prime Minister Brian Cowen emphasized that the mission would look at what assistance Ireland might require, again rejecting suggestions his government was discussing a bailout.

“What we want to concentrate on now is in a focused way, over coming days, to sit down and see in what way can assistance be provided to ensure that these issues can be dealt with properly and appropriately,” he told parliament.

“There has been no question of the government ... (being) in a negotiation for a bailout,” he said, dismissing the term as pejorative to hoots of opposition derision.

He later told RTE television there were “sensible, precautionary discussions” under way. “It’s urgent. We accept it’s urgent and we need to deal with it.”

The EU’s commissioner for economic affairs, Olli Rehn, said the EU-IMF team would work intensively with Ireland “to determine the best way to provide any necessary support to address market risks, especially as regards the banking sector.”

“This can be considered as an intensification of the preparations for a potential program if requested by the Irish government and deemed necessary by the euro area member states,” he told reporters after the finance ministers’ meeting ended.

Irish Finance Minister Brian Lenihan said euro zone peers had welcomed his four-year, 15-billion-euro budget-cutting strategy which he hopes to publish next week, suggesting he sees no need for further fiscal tightening.

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But he admitted the banking sector needed help.

“What may be required may not in fact be an actual transfer of money now but demonstration of how much money can be made available if further difficulties materialize,” he said.

Ireland has said the bill for cleaning up its banks could top 50 billion euros but investors fear the final figure could be even higher given rising residential mortgage arrears, deposit outflows and higher funding costs.

Financial markets appeared unimpressed by Dublin’s decision to reject sovereign assistance, with the premium investors charge for holding Irish 10-year bonds rather than German Bunds holding at a near-record 575 basis points.

LCH.Clearnet, a clearing house for sovereign debt, doubled its margin requirement on Irish bonds to 30 percent of net positions, an indication of the increased risk of default.

Underlining the fear that Ireland’s problems could spread, Portugal’s borrowing costs soared at a treasury bill auction, with yields for 12-month paper jumping more than 150 basis points from a tender earlier this month.

Lenihan dismissed suggestions that Ireland should raise its ultra-low 12.5 percent corporation tax rate to help cut its debt. Higher-tax countries, including Britain and Germany, have long seen the Irish rate as a form of unfair competition.

“Of course our corporate tax rate is safe,” he said.

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Austrian Finance Minister Josef Proell, however, was quoted as saying the Irish corporate tax rate would have to be discussed in any talks on aid, foreshadowing tough negotiations.

Proell earlier told Reuters Insider TV that other euro zone countries were pressuring Dublin to seek a bailout to help stabilize the euro and avoid a spillover to other countries.

“Contagion risk is one of the dangers that is behind our pressure to Ireland to go under the umbrella,” he said.

After Proell spoke, the Irish finance ministry said its position was unchanged that the corporate tax was protected.

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Ministers took a tough line on Tuesday with Greece, the first country to receive an IMF-euro zone rescue, telling Athens to cut its spending further to meet budget deficit reduction targets agreed as part of its bailout.

INEVITABLE?

While Ireland made no request for immediate EU rescue, resisting pressure to follow in Greece’s footsteps, economists said a state bailout remained a probability even though its public borrowing needs are funded until mid-2011.

“Will Ireland dig its way out of this hole without support?” asked Commerzbank’s Peter Dixon in a research note.

“Alas probably not, because it has lost market confidence ... In the absence of measures to restructure the banking debt, we see a high probability that Ireland will ask for European Financial Stability Facility funding early next year.”

Some analysts said Dublin appeared to be playing for time partly to avoid the political humiliation of applying for aid before a key November 25 parliamentary by-election. An opinion poll released on Wednesday suggested Cowen’s Fianna Fail party is set to lose that vote anyway, reducing the governing coalition’s majority to just two seats.

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.

Euro zone sources said there was an agreement in principle to trigger aid when the joint mission completes its work -- perhaps in days -- and the aid would not be just for the banks.

Irish banks, pushed to the brink by the financial crisis and a property collapse, came under further downward pressure, with shares in Allied Irish falling anew. They have lost 70 percent of their value this year.

The bank, which will be more than 90 percent owned by the state following a rights issue later this year, will issue a trading statement later this week.

The country’s largest lender Bank of Ireland signaled last week that it had seen 10 billion euros in outflows of deposits between early August and the end of September.

But Bancassurer Irish Life & Permanent said on Wednesday it was confident Irish banks would be adequately capitalized to deal with any downturn in the country’s residential mortgage market.

After Greece’s near collapse, the stakes are high. European Council President Herman Van Rompuy, who heads the body that groups the EU’s 27 national governments, said the EU’s future could be at stake, although others played down those risks.

Britain, whose banks have around $150 billion of exposure to Irish debt, said it stood ready to help, although it was unclear what steps it might take to assist Ireland.

“Ireland is our closest neighbor and it’s in Britain’s national interest that the Irish economy is successful and we have a stable banking system,” Chancellor of the Exchequer George Osborne said.

Additional reporting by Dublin and Brussels bureaus and by Emelia Sithole-Matarise in London, writing by Luke Baker and Paul Taylor, editing by Mike Peacock and Susan Fenton

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