DUBLIN/BRUSSELS (Reuters) - The EU and IMF agreed on Sunday to help bail out Ireland with loans to tackle the country’s banking and budget crisis in a move aimed at protecting Europe’s wider financial stability.
Ireland, facing widespread public anger over its handling of the crisis, formally requested the aid on Sunday evening.
“The European authorities have agreed to our request,” said Prime Minister Brian Cowen. “I expect that agreement to be finalized shortly, within the next few weeks.”
The size of the rescue by European authorities and the International Monetary Fund has yet to be negotiated but is likely to be smaller than Greece’s 110 billion euro ($150 billion) bailout last May.
“I would say we are talking about 80-90 billion euros,” a senior EU source said, adding that this sum would include money to support the Irish banking sector.
Economic and Monetary Affairs Commissioner Olli Rehn said experts from European Commission, European Central Bank and IMF would prepare a three-year package of loans by the end of the month.
“Providing assistance to Ireland is warranted to safeguard the financial stability in Europe,” Rehn told Reuters.
“The program under preparation will address both the fiscal challenges of the Irish economy and the potential future capital needs of the banking sector in a decisive manner.”
IMF managing director Dominique Strauss-Kahn said Commission, ECB and IMF officials who are already in Ireland would begin swift discussions on a multiyear loan.
Britain, which is not part of the euro zone, said it would contribute about 7 billion pounds in aid.
EU policymakers have feared that Ireland’s problems might spread to other euro zone members with large budget deficits such as Spain and Portugal, threatening a systemic crisis.
In Berlin, German Finance Minister Wolfgang Schaeuble played down this risk. “If we now find the right answer to the Irish problem, then the chances are great that there will be no contagion effects,” he told ZDF television.
However, some economists were less optimistic. “I think it means Portugal is next (to request help). I don’t know if it will happen before the end of the year or after, but it’s almost inevitable now,” said Filipe Garcia at Informacao de Mercados Financeiros in Porto.
“I don’t know what the markets will say tomorrow,” said Pedro Schwartz at San Pablo University in Madrid. “If Portugal is forced to take a bailout then they’ll turn their attention to Spain ... I think Spain is differentiated but they’re not out of the woods. And the euro in general is not out of the woods.”
Ireland’s government said a central element of the program would be “to support further deep restructuring and the restoration of the long-term viability and financial health of the Irish banking system.”
Finance Minister Brian Lenihan told a news conference that Irish banks would be significantly smaller than they had been and that they may look at selling non-core assets.
However, raising Ireland’s super-low corporation tax — a bone of contention with higher rate euro zone partners — was off the agenda, Lenihan said, and was key to future growth.
Irish banks, brought to the brink of collapse by exposure to a property and construction sector that slumped after the global financial crisis, have grown dependent on ECB funds and suffered an exodus of deposits over the past six months.
Fears about the health of the sector have pushed up Irish borrowing costs, effectively forcing Ireland to seek aid even though the government is fully funded until mid-2011.
“I think it will pacify the markets but whether it will satisfy them in the long-term is another day’s work,” said Brian Lucey, associate professor of finance at Trinity College Dublin.
The euro rose broadly in Asian trading after news of the planned bailout. The euro rose as high as around $1.3743, up from $1.3683 late in New York on Friday.
In May, the EU and IMF launched the 110 billion euro rescue package, the first of a euro zone country, aimed at pulling Greece back from the brink of bankruptcy. In return, Athens promised harsh austerity measures that brought large numbers of Greeks onto the streets in protest.
Ireland has already implemented a series of austerity measures over the past two years and said last month it planned further cuts in spending and tax changes to cut 15 billion euros from the budget by 2014.
That four-year fiscal plan will be published later this week. Local media said the package would include a new property tax and cuts to the minimum wage, child benefits and job seekers’ allowances. Tax breaks for higher earners may also go.
Unions have warned further austerity measures could spark unrest in Ireland.
Calls are already growing for the government to stand down over its handling of the crisis and the main opposition party said on Sunday it would consider putting forward a vote of no-confidence in the government, possibly before a December 7 budget.
A spring election is likely even if the government manages to pass the first of its austerity budgets next month due to ruling Fianna Fail’s razor-thin parliamentary majority, which is expected to be cut further in a by-election on Thursday.
Additional reporting by Lorraine Turner and Padraic Halpin in Dublin, Brian Rohan in Berlin; Martin Santa in Bratislava; Writing by Jodie Ginsberg and David Stamp; Editing by David Stamp