Irish bank shares higher over EU-IMF rescue plan

[May 10, 2011]  DUBLIN (AP) -- Shares in Ireland's banks rose sharply Monday as investors welcomed an international agreement to provide euro67.5 billion ($89 billion) in rescue loans for Ireland, particularly its immediate focus on injecting euro10 billion into the cash-strapped banks.

However, opposition leaders condemned the plan's requirement that Ireland commit the bulk of its cash and pensions reserves, euro17.5 billion, into its own rescue effort. They warned that the EU-IMF credit line's average interest rate of 5.8 percent would be too high to repay.

The senior International Monetary Fund negotiator, Ajai Chopra, stressed his view that Ireland was now well positioned to reassure investors and, eventually, resume normal borrowing once the interest rates being demanded on open markets fall below the cost of EU-IMF funds provided.

"This is a very good deal for Ireland in current circumstances," said Chopra, who arrived in Dublin 12 days ago to oversee negotiation of a bailout deal that leaders of all 27 EU nations approved Sunday at an emergency meeting.

"It's clearly much better than what Ireland could get if it had to borrow on the market right now. ... As the program begins to work, we would expect that Ireland would be able to go back into the markets and borrow again," he said.

The yields on Ireland's 10-year bonds eased slightly Monday to 9.12 percent, but remained near the euro-era record high of 9.24 percent reached Friday.

The euro currency initially rose in value but quickly slipped back as investors remained unconvinced that the Irish deal would ease wider fears of eventual debt defaults somewhere in the 16-nation eurozone. The cost of borrowing on bond markets rose for Spain, declined for Portugal, and was little changed for Greece.

Chopra said it was smart to require Ireland to use its long-term pension money, which was earning 1 percent interest, to reduce a bailout bill costing far more to finance.

"It's making the best use of the money that Ireland has set aside. It's a sign of strength," Chopra told Irish state broadcaster RTE.

Ireland's three publicly listed banks surged on the Irish Stock Exchange following Sunday's deal, which emphasizes that more of their toxic property-based loans will be transferred to Ireland's "bad bank," the National Asset Management Agency.

The deal provides euro10 billion immediately to boost their reserves while euro25 billion more remains available to draw down if markets don't resume lending at better rates to the banks. The remaining euro50 billion is earmarked for use to cover Ireland's expected deficits through 2014.

Chopra says IMF and EU experts in coming weeks will subject each Irish bank to a series of stress tests including worst-case scenarios to determine how much cash they need.

Ireland has already committed at least euro45 billion to bailing out five Dublin banks, a bill that the government was forced to concede in recent weeks it could no longer finance on its own.

Shares in Irish Life & Permanent -- the only Dublin bank yet to receive any bailout cash -- rocketed 42 percent in the first hour of trade off its record low Friday. Bank of Ireland jumped 23 percent as it announced plans to try to raise euro2.2 billion on its own without resorting to another bailout. Allied Irish Banks rose 7 percent, reflecting its humbled status as more reliant on bailout funds and likely to fall soon into majority government ownership.

Some economists condemned the EU-IMF deal as designed to shackle the losses of Irish banks to Irish taxpayers, rather than pass any losses to the banks' senior bondholders -- chiefly other banks in Britain, Germany and the United States -- that loaned the lost billions in the first place.

"We have a choice between the solvency of the state and the solvency of the banks. We needed to sever those links. This deal instead has soldered the links between the banks and the state," said David McWilliams, a former Irish Central Bank economist who has argued in vain for Ireland to force senior bondholders to share losses.

"Of course the bank shares will rise," he said of Monday's sharp gains. "We've just put 10 billion in their pocket."

[Associated Press; By SHAWN POGATCHNIK]

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