Ireland aid plan next week, contagion fears persist

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BRUSSELS: A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources said on Friday. However, experts warned that a rescue may not be enough to prevent contagion in the single currency bloc.
The rise in euro and investors demand to buy Irish and other peripheral euro zone debt instead of benchmark German bonds narrowed in a sign of optimism that an aid deal for Dublin will be sealed soon. However, a poll of participants at a high-level banking congress in Frankfurt showed that nearly three quarters believed the crisis that has shaken the euro zone for a full year would rage on even after an Irish rescue and ensnare other financially weak countries such as Portugal.
“As long as the fundamentals don’t improve, the pressure will continue on other countries too,” Daniel Gros, who heads the Centre of European Policy Studies, told Reuters Insider TV at the congress. “The problem is that no problems are currently being solved. Many believe that the euro zone is just moving from one crisis to the next.”
Ireland’s central bank chief has acknowledged that the country needs a loan running into the tens of billions of euros to shore up an extremely fragile banking sector that has grown dependent on ECB funds.
Reflecting concerns among other euro zone periphery countries that Ireland’s financial troubles could spread, Greece’s finance minister pressed Dublin to move fast.
“We are now at a point where decisions have to be taken,” George Papaconstantinou told the banking congress in Frankfurt. “Time is of the essence.”
Unclear on aid amount: Irish Community Minister Pat Carey said that the government would publish the details of a four-year fiscal plan to save 15 billion euros early next week. EU sources said that the financial aid plan for Ireland would be presented at roughly the same time.
“They would be close in time,” an EU source with insight into the process said. Sources have told Reuters that Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.
The head of the euro zone’s temporary fiscal safety net, from which funds could come, said that the aid could be raised in five to eight days if needed, notably from investors in Asia.
“We are confident that we can raise the necessary funds from institutional investors, central banks and sovereign funds, in Asia in particular,” Klaus Regling, chief executive of the European Financial Stability Facility, told French daily Le Monde.
Carey said that it was impossible to say how much aid Ireland would need until a joint mission of the European Commission, European Central Bank and International Monetary Fund, which arrived in Dublin on Thursday, had gotten to grips with the state of the banks.
Banks in Ireland have been largely shut out of market lending due to concerns about their solvency. They are almost entirely reliant on funding from the ECB, which reached 130 billion euros by end-October, plus an extra 35 billion euros from the Irish central bank.
Allied Irish, the hardest hit listed Irish bank, is expected to give a trading update later on Friday which will be scrutinised for signs of any rise in retail deposit withdrawals.
Dublin’s borrowing costs have rocketed since late October as concerns about the banks’ swelling liabilities and a German-led drive to create a system for restructuring stricken euro zone state debts unsettled investors.
Markets have settled after it became clear Ireland was open to financial aid.
On Friday, the euro pushed up to $1.3720 and the risk premium on Irish 10-year bonds edged down to 5.45 percentage points over German benchmark Bunds. The bond spreads of other financially weak euro countries like Greece and Portugal also fell.