Central bank expects Ireland to take EU-IMF loan

[November 18, 2010]  DUBLIN (AP) -- The governor of the Central Bank of Ireland said Thursday he expects his debt-crippled country to accept a loan worth tens of billions of euros (dollars) soon from the European Union and International Monetary Fund.

Patrick Honohan made his frank assessment as forensic accountants and financial specialists from the EU and IMF landed in Dublin to identify the size of the hole in state and bank finances and the measures needed to reassure markets that Ireland won't default on debts.

Those doubts have risen since September when Finance Minister Brian Lenihan raised the government's estimated cost of bailing out five Irish banks to at least euro45 billion ($62 billion). That gargantuan bill has driven Ireland's 2010 deficit to 32 percent of GDP, a post-war European record. Ireland is planning a four-year austerity plan, including a 2011 budget with euro4.5 billion in cuts and euro1.5 billion in new taxes, in response.

Honohan, speaking in Frankfurt where was attending a meeting of the European Central Bank board, said he expected the EU-IMF loan -- if approved by the Irish government -- to provide a financial "buffer" for Irish banks that would not be used. He compared it to similar U.S. moves in 2008 to inject banks with cash that reassured investors and was eventually repaid.

"It's true that our banks need additional confidence. ... There have been substantial outflows of capital from Irish banks since April," Honohan said in an interview with Irish state broadcasters RTE.

As foreign investors have withdrawn or failed to renew deposits in Dublin banks, the ECB and Irish Central Bank have filled the gap with loans estimated to total euro130 billion. The ECB's lending to Ireland has grown in recent months to represent nearly a quarter of the Frankfurt bank's total lending in the 16-nation eurozone. An EU-IMF cash injection would be designed to reverse the foreign outflow of capital.

Honohan said it was "desirable that the (Irish) banks should have more capital available to show to the markets: Look, this is beyond question."

The governor, who is independent of the government, said he expected Ireland and the EU-IMF delegation to agree terms and conditions on a loan worth "tens of billions" that "will be made available and drawn down as necessary."

"The capital is probably not required at all," he said, adding it would most likely be "shown but not used." It "goes in as buffer and comes out again when it's not needed."

The talks in Dublin could last days and will be held with Ireland's Department of Finance, Central Bank, National Treasury Management Agency and other agencies.

[Associated Press; By SHAWN POGATCHNIK]

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