Ireland said it would ask for international bailout as the European Central Bank President Jean-Claude Trichet indicated that the debtor nations-cannot be trusted to keep its financial system afloat forever.
Finance Minister Brian Lenihan said in Dublin that it would welcome the creation of "a significant equity financing of emergency" for Irish banks. In Frankfurt, Trichet said in a speech that first used the policies to combat global credit crisis can not "become a dependency of the conditions normalize."
The ECB is concerned that banks in Ireland and Greece are becoming too dependent on their unlimited money market operations and is pushing Ireland to accept a rescue funded by EU governments and the International Monetary Fund. Irish Central Bank Governor Patrick Honohan, said today that an agreement can amount to "tens of billions" of euros.
EU, IMF and now ECB officials began studying the books of Irish banks battered by the housing slump in the country. Investors dumped bonds of Ireland last week by worries about the country's ability to keep its financial system afloat, forcing the government of Prime Minister Brian Cowen, to abandon its refusal to seek outside help.
"It's pretty clear that the banking sector is under great stress and the money is coming from banks and this should be addressed," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. "We have to take the money and stick with it."
"Very desirable"
Irish bonds rose today, pushing bond yields to 10 years in the country up 5 basis points to 8.28 percent as of 14:55 in Dublin. The premium investors charge to keep the benchmark German bond fell to 542 basis points from 554 basis points yesterday. Hit a record 652 points on 11 November. Honohan said that Ireland is likely to pay a rate close to 5 per cent interest on loans, similar to the rate offered to Greece when ransom in April. Lenihan said it was "very desirable" to create a trust that must not be used. An agreement is not here yet
"It will be a huge loan for the purpose of the amount advanced or to be made available, to show Ireland has a sufficient arsenal to address concerns of the market," said Honohan. "We're talking about a substantial loan."
Balancing Act
problems in Ireland, following the near collapse of the finances of Greece earlier this year, contrasts with the strong economic growth in Germany. Europe's biggest economy expanded at the fastest pace since 1990 in the second quarter and business confidence rose to its highest since May 2007 last month.
That is to address the ECB with a balancing act in trying to prevent Germany from overheating while the financial system underpinning the periphery of the euro region.
"The ECB seems very uncomfortable with the role it has had to play in this ongoing drama," said David Mackie, chief European economist at JPMorgan Chase & Co. in London, "a central bank's lender of last resort function not intend to fund fifteen to twenty percent of the balance of the banking sector in an open-ended basis. "
Underscoring the reluctance of the ECB to be blown off course, Trichet emphasized the central bank's willingness to withdraw the emergency measures if needed next year. ECB's benchmark rate is currently at a record low of 1 percent.
"We believe that we are not obliged to remove non-standard measures before considering interest rate increases, we could do one or the other or both," he said.
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Ireland's banking crisis has added to the tax burden on the nation after the recession and falling real estate tax revenues eroded. The talks with the EU and the IMF may change the government's finances after Economic and Monetary Affairs Commissioner Olli Rehn said on 16 November that the banking problems in Ireland are "overflowing the sovereign." Said an EU official familiar with the talks November 16 that a package can pave the way for the government to stay out of the bond market for a long time.
Fitch Ratings said today it will revise its level of Ireland "in light of any package agreed with the IMF and the EU."
The review will include an assessment of "the likelihood that it would allow Irish banks, and in particular the government to regain access to market financing at affordable prices," Fitch said in a statement. He got credit grade from AA Ireland, on 6 October and said the country was in a "negative outlook."
Budget Plan
Lenihan is due to publish details of a period of four years, 15 million plan to reduce the budget deficit this month and its 2011 budget on December 7. Government of Ireland has said the final cost of the bailout may amount to EUR 50 million (sixty-eight billion), about a third of gross domestic product.
Honohan, said it was "true that banks need more confidence," even after the government pumped billions of euros to lenders such as Allied Irish Banks Plc and Anglo Irish Bank Corp. "Our efforts, huge amounts of money made by the government to support banks have not yet generated enough confidence "among investors, he said.
Allied Irish subordinated notes fell today on speculation no ransom for the EU and the IMF will impose losses on bondholders.
The bank bonuses of 12.5 percent subordinated due 2019 were quoted at a bid price of about 45 percent of its nominal value, according to Jefferies International in London, down from 100 percent in September . Swaps credit-default secure € 10,000,000 of the debt upfront cost € 5,100,000 and € 500,000 annually, according to CMA.
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