Eurozone Plans Possible Irish Bailout

The European Commission says the EU stands ready to support Ireland "in case of need."

European Union monetary affairs chief Ollie Rehn has said that Ireland was "committed" to working with the European Central Bank, and the International Monetary Fund, which were intensifying work on a possible Irish banking sector bailout.

"These preparations, from the Commissions point of view, can be regarded as an intensification of a potential program with an accent on the restructuring of the banking sector in case it is requested and deemed necessary," Rehn commented.

Rehn spoke after European finance ministers concluded an anxiously-watched meeting in Brussels on November 16.

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.

Ireland has already taken over three banks and is expected to take over more in a bailout that has already reached 45 billion euros ($61 billion) and is expected to push the nation's 2010 deficit to 32 percent of GDP.

Representatives of the European Union, the European Central Bank and the International Monetary Fund will travel to Ireland this week for more talks.

Jean-Claude Juncker, chairman of the Eurogroup of 16 nations using the euro, made it clear that it was the "responsibility of the Irish government" to take the next step, adding that the Eurogroup would be supportive should Ireland ask for help.

British treasury chief David Osborne promised Britain would help Ireland is needed, saying it's in "Britain's national interest" that Dublin overcomes its budget woes.

Growing Concern

As of November 17, EU finance ministers are continuing meetings. Ireland's problems are the second major threat to the eurozone following the Greek bailout by European and international partners with a 110-billion-euro rescue package six months ago.

On November 16, Austrian Finance Minister Josef Proell said eurozone countries would delay payment of the next installment of an emergency loan to Greece from December to January, because Greece had not fulfilled the requirements of the bailout agreement.

The Irish crisis has contributed to rising costs for borrowing by other countries in the 16-country eurozone which face their own problems -- such as Spain and Portugal.

Amid growing pressure from the European Central Bank for Ireland to take quick action and accept a bailout deal, Irish Prime Minister Brian Cowen announced on November 15 that Dublin will not apply to the European Union or to the International Monetary Fund to receive support for its state budget, saying the country is "prefunded right up to the middle of next year."

"Clearly there has been a lot of concern within the euro area itself regarding market conditions, as you know the cost of money, as expressed in bond markets, have been very high," Cowen couched other countries' fears. "What will be the normal situation is that we have to discuss these matters with partners as to how best we can underpin financial and banking stability within the euro area."

Simon Tilford, the chief economist for the London-based Center for European Reform, says a request from Ireland for other eurozone members to stabilize the Irish banking sector essentially amounts to support for the Irish state budget:

"Investors have started to shun Irish government debt because they are worried about the [possible] liabilities in the country's banking sector -- because the Irish government has essentially underwritten the debts of the private banks," Tilford explains. "The underlying problem is one of excessive indebtedness, whether that is public or private, and question marks over the [Irish] economy's ability to grow rapidly enough to service those debts."

Possible Spill-Over

Ewald Nowotny, a member of the European Central Bank's governing council, said the European Union wants a "quick, good solution to Ireland, so that there will be no spill-over" of the crisis to other countries seen as being on the brink of their own debt crises, like Portugal and Spain.

In a stark warning on November 16, EU president Herman Van Rompuy said the debt crisis now requires all countries that use the common euro currency "to work together in order to survive with the eurozone." Van Rompuy also said "if we don't survive with the eurozone we will not survive with the European Union."

Economist Tilford says such a warning raises the pressure for a crisis mechanism proposed by Germany from the start of 2013 -- a permanent fund that would replace the temporary 440-billion-euro European Financial Stability Facility set up after Greece sought financial support in May. Tilford says that without such backing "investors will believe that default is inevitable and correspondingly demand punitive interest rates."

"Contagion to other members states will be all but inevitable. If and when that reaches Spain, then the crisis could spiral out of control," Tilford warns. "This does have the potential to split the eurozone. I don't think there is any chance of the eurozone as a whole unraveling. But investors now are far from convinced that the eurozone will survive in its current membership."

In Spain, Central Bank governor Miguel Angel Fernandez Ordonez has urged Dublin to do more to calm financial markets, telling reporters that Ireland "should take the decision at the right moment."

Portuguese Finance Minister Fernando Teixeira dos Santos said Lisbon has no plans for now to request emergency foreign funding.

written by Ron Synovitz with agency reports