A plan to provide financial support for Ireland is taking shape, subject to the merciless scrutiny – and speculation – of the financial markets. 

Once officials from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) have completed an assessment of the state of Ireland’s public finances, the credibility of its budget plan for the next four years and the state of the banking sector, Ireland would make a formal request to the EU for financial assistance.

Boosting capital reserves

Click Here: gold coast suns 2019 guernsey

The needs of Ireland’s banking sector are estimated at €60 billion-€80bn. While this money would be requested by the government, it would be transferred to banks to boost their capital reserves. EU officials make a comparison with the €110bn loan package provided for Greece in May, which contains €10bn specifically to recapitalise Greek banks.

This would allow Irish banks to reduce their reliance on funding from the ECB. Over the past week, the ECB has made it clear that it does not want to continue providing high levels of liquidity to Irish banks.

In theory, there is a total of €750bn available in funding because new instruments were agreed in May to deal with a eurozone crisis. These include a €60bn European Financial Stabilisation Mechanism (EFSM), using funds from the EU budget, and a European Financial Stability Facility (EFSF), set up in Luxembourg as a private-sector company, which can issue up to €440bn. The IMF has also agreed to provide a further €250bn.

EU officials say that the €60bn from the EFSM would be easiest to tap into because funds can be released through a decision by a weighted majority of member states. Releasing money from the EFSF needs a unanimous decision by the 16 countries of theeurozone.

Klaus Regling, head of the EFSF, said in Brussels on Tuesday (16 November) that it could raise the funds needed within five to eight working days of any request. He said that there was a great deal of appetite from investors for bonds issued by the EFSF. “I’m confident that we would have no problem finding the necessary resources to meet these demands,” he said.

Fact File

The Downward Spiral

The European Council agreed on 28-29 October to create a permanent crisis bail-out mechanism. The agreement came at the behest of Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, who said a change to the EU’s treaty to permit such a mechanism is essential and urgent.

Although the details of the mechanism are yet to be agreed, Merkel suggested that private investors should be forced to help pay for any future debt bail-outs.

Jean-Claude Trichet, the president of the European Central Bank (ECB), warned that demands for private investor involvement could cause a backlash from the bond markets.

Investors started to shun Irish, Portuguese and Greek debt over fears that bondholders would face losses in the case of a default.

At last week’s G20 summit in Seoul, the finance ministers of the five biggest EU member states issued a statement to reassure holders of eurozone debt that they did not stand to lose part of their investments. Bonds now on the market would be exempt from restructuring imposed under the permanent bail-out mechanism, they said. The ministers tried to reassure investors that the existing European Financial Stability Facility did not require private investor involvement.

Yields on Irish ten-year bonds had hit an all-time high of 9.26% on 11 November. They fell back to 8.22% on 12 November after the statement from the five finance ministers.

Mixed aid sources

In practice, EU officials said that Ireland would get some funds from the EFSF’s €440bn so that the €60bn in the EFSM are not exhausted. IMF funds can also be paid out very quickly, officials said.

The Commission’s hope is that it can end market fears that a crisis in Ireland’s banking sector threatens the government’s ability to repay its debts. It wants to stop contagion spreading to the rest of the eurozone and send a clear signal that the €750bn that the EU has lined up to avert a eurozone crisis can be deployed quickly and convincingly.