Europe seeks concrete response to Irish crisis

[November 17, 2010]  BRUSSELS (AP) -- European nations strove to find a concrete response to Ireland's debt crisis and protect other vulnerable countries Wednesday after earlier efforts were bogged down in a morass of political complications.

Irish and EU officials had vowed the day before to stabilize the banks at the center of the country's financial crisis to restore confidence in the wider 16-nation eurozone, but fell short of offering a bailout of any kind.

Representatives of the EU, the European Central Bank and the International Monetary Fund will be in Dublin on Thursday to determine what to do about the banks.

On Wednesday, when ministers from the broader 27-nation European Union were meeting, Britain offered support on top of any that might come from the eurozone.

Britain "stands ready to support Ireland" in whatever the debt-stricken country needs to do to stabilize its troubled banking system, said Finance Minister George Osborne. The U.K. is a member of the EU but not of the eurozone.

"It is natural (that the U.K. would be interested in helping to stabilize Ireland), because the United Kingdom and U.K. banks have a very, very significant exposure in Ireland," said the EU's monetary affairs chief Olli Rehn.

Ireland has taken over three banks and is expected to take over more in a bailout that has already reached euro45 billion ($61 billion) and likely will push the nation's 2010 deficit to a staggering 32 percent of GDP. The government in Dublin insists it doesn't need a bailout from Europe, but growing doubts about Ireland's ability to pay its bills have sent interest rates soaring on Irish bonds.

Those concerns have also worsened the debt crisis for other vulnerable European countries, pushing borrowing costs up to an extent that threatens to destabilize the common euro currency.

The priority for European leaders is containing a contagion, and many think a concrete response is the only solution.

Underlining the importance of a decision on Ireland for the banking sector in the wider eurozone, Josef Ackermann, the chief executive of Deutsche Bank AG also attended Wednesday's meeting of finance ministers.

"A breakout of any state on the markets right now would lead to contagion and we want to avoid this with all means," Ackermann said. "We have to do everything to catch every country that runs into trouble."

Behind Ireland stands Portugal, one of the eurozone's smaller members with 1.8 percent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big -- 11.7 percent of eurozone output -- that it could present a much larger challenge if it needs help.

The extent of political tensions over paying for state bailouts was underscored Wednesday after Austria claimed the next installment in Greece's international bailout loan would be delayed, a claim promptly rejected by EU and Greek officials. Austria said it is concerned that Greece will not be able to cut its deficit as much as expected.

Governments struggling with debt -- built up during the recession and in some cases over years of living beyond their means -- have slashed spending and raised taxes. But such austerity measures threaten to undermine desperately needed economic growth, in turn making it harder for nations to repay their debts.

Bond investors responded to Wednesday's expectations of an Irish bailout by continuing to sell the treasuries of Ireland and fellow emergency-aid case Greece, but buying treasuries in the eurozones other debt-troubled members.

In midmorning trade, yields on Irish 10-year bonds rose to 8.28 percent, equivalent Greek bonds to 11.66 percent. But Portugal, Spain and Italy all saw the interest rates on their 10-year debt securities decline to 6.75 percent, 4.60 percent and 4.20 percent respectively. The rate on 10-year German bunds, the benchmark of safety in the eurozone, dipped further to 2.61 percent. Bonds being dumped must pay higher rates, while those in demand pay out less.

"Ireland is now engaging in an intensive, and disclosed, engagement in relation to the problems in the banking sector," said Irish Finance Minister Brian Lenihan said Tuesday night. "We will take whatever decisive measures that are required to stabilize our banking system as part of the stability of the wider eurozone."

A euro750 billion ($1 trillion) backstop, funded by eurozone countries and the IMF stands ready to help nations that run out of money, EU officials have emphasized.

The Irish government protests it doesn't need aid, at least not yet, because it has sufficient funds through mid-2011 and is planning euro6 billion in 2011 cuts and tax hikes. However, it has suggested that direct EU aid to its cash-strapped banks would boost Ireland's creditworthiness, since the government has guaranteed the banks' financial obligations.

An Irish bailout would mean humiliation for the government ahead of possible national elections early next year. Ireland would lose some control over its finances in return for loans, which could mean being forced to give up the country's rock-bottom corporate tax rate -- a key attraction to businesses that annoys other EU countries that have much higher rates.

The low tax rate helped Ireland become one of Europe's fastest growing economies over the past decade, transforming it from a resident of Europe's poorhouse into a "Celtic tiger." But when the boom collapsed in amid the financial crisis of 2008, Dublin was forced to rescue its banks, which had grown massively in recent years.

The current panic over Ireland began in the wake of revelations that the cost of its bank bailout had risen sharply. The pressure worsened after Germany said bond holders should absorb part of the losses in any future bailouts. EU leaders slowed a bond sell-off with a statements that existing debt holdings wouldn't be affected, but couldn't restore calm.

Should Ireland request aid after all, it wouldn't take long to raise the necessary money, said Klaus Regling, who runs the European Financial Stability Facility, the eurozone's portion of the euro750 billion financial backstop. It would issue bonds backed by eurozone governments.

"If one of our shareholders requests financial support, then the EFSF would be able to go to the markets very quickly," Regling said. After that, it would take five to eight working days to raise the money, he added.

[Associated Press; By GABRIELE STEINHAUSER]

Associated Press writer Shawn Pogatchnik contributed from Dublin.

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