Dublin: Ireland’s central bank chief said on Thursday he expected the country to receive tens of billions of euros in loans from European partners and the IMF to help shore up its shattered banks and stabilise the economy.
Central bank governor Patrick Honohan was speaking shortly before the start of talks with a joint mission of the European Commission, the European Central Bank and the International Monetary Fund on a possible rescue package.
“The intention is and the expectation is, on their part and personally on my part, that negotiations or discussions will be effective and a loan will be made available and drawn down as necessary,” he told state broadcaster RTE.
“We’re talking about a very substantial loan for sure -- tens of billions, yes,” Honohan said, acknowledging that there had been substantial outflows of funds from the Irish banking sector since April.
After 10 days of losses, European stock and bond markets and the euro recovered slightly on expectations that Ireland would become the second euro zone country after Greece to receive a bailout to cope with high debts and deficits.
Dublin’s borrowing costs have gone through the roof since late October as concerns about the banks’ swelling liabilities and German-driven EU moves to create a system for restructuring stricken euro zone states’ debts unsettled investors.
“To some extent the market is anticipating (a bailout), but once the announcement is made I think we will see these spreads come in,” said Nick Stamenkovic, a bond market strategist at RIA Capital Markets in Edinburgh.
EU sources have told Reuters Ireland may need assistance of between €45 billion and 90 billion, depending on whether it needs help only for its banks or for public debt as well.
In an indication of potentially tough negotiations ahead, France said Ireland may have to raise its ultra-low 12.5% corporation tax rate -- a taboo in Irish politics -- in return for the assistance package.
French finance minister Christine Lagarde said Irish business taxation was abnormally low by European standards, while income taxes were broadly in line with the EU average.
“So we will have to see how these (corporate) rates can be changed without weighing down the Irish economy and driving away investors,” she told France-Inter radio.
Higher-tax countries, including Britain, Germany and France, have long seen the Irish rate as a form of unfair competition.
Irish Prime Minister Brian Cowen has repeatedly rejected suggestions that his government is discussing a bailout that would place public finances under EU-IMF supervision.
Finance minister Brian Lenihan insisted on Wednesday after talks with EU peers that the Irish corporate tax was “safe”.
One of the country’s leading businessmen, budget airline Ryanair chief executive Michael O’Leary, said the government was incapable of running the economy and the Irish should welcome being put under IMF stewardship as soon as possible.
“The country is bankrupt. We’re now being bailed out. The government has been lying to us all week. When Irish government bonds are yielding at nearly nine percent and you can borrow off the IMF at three percent ... the only way out is the IMF, and frankly sooner the better,” O’Leary told reporters in Dublin.
Lenihan said euro zone peers had welcomed his four-year, 15 billion euros budget-cutting strategy, due to be published next week, suggesting he sees no need for further fiscal tightening.
Ireland has said the bill for cleaning up its banks could top 50 billion euros but investors fear the final figure could be even higher given rising residential mortgage arrears, deposit outflows and higher funding costs.
Some analysts said Dublin appeared to be playing for time, partly to avoid the political humiliation of applying for aid before a key 25 November parliamentary by-election.
An opinion poll on Wednesday suggested Cowen’s Fianna Fail party is set to lose that vote anyway, reducing the governing coalition’s majority to just two seats.
Euro zone sources said there was an agreement in principle to trigger aid when the joint mission completes its work -- perhaps in days -- and the aid would not be just for the banks.
Irish banks have been pushed to the brink by the financial crisis and a property collapse.
Allied Irish, whose shares have lost 70% of their value this year and which will be more than 90 percent owned by the state following a rights issue later this year, will issue a trading statement later on Thursday.
The country’s largest lender Bank of Ireland signalled last week that it had seen a 10 billion euros outflow of deposits from early August until the end of September.
After Greece’s near collapse, the stakes are high. European Council President Herman Van Rompuy, who heads the body that groups the EU’s 27 national governments, said the EU’s future could be at stake, although others played down those risks.
Britain, whose banks have around $150 billion of exposure to Irish debt, has said it stands ready to help, and Lagarde said France expected London would provide bilateral loans in any package, given its close economic ties with Dublin.