Ireland’s finance minister will recommend applying for a bail-out loan from the International Monetary Fund and European Union when the cabinet meets on Sunday.
Brian Lenihan said the loan “certainly will not be a three figure sum,” describing the support it would bring as a “powerful demonstration of the firepower behind the banks.”
Mr Lenihan said Ireland’s economy was too small to cope with the banking crisis unaided. “The banks were too big a problem for the country, I accept that,” he said
But he rejected suggestions that his banking strategy had failed. The European Commission and others said the steps the Irish government had taken were “courageous, correct and bold” but that the country needed to “intensify the existing approach,” he said.
Mr Lenihan said Ireland’s banks had been reliant on liquidity assistance from both the European Central Bank and the Irish Central Bank, but he said “this type of process cannot continue indefinitely”.
Speaking on Irish radio, he declined to disclose the interest rate but said it would be “a lot less than what we have to borrow at if we went to the world markets.”
Sunday’s special cabinet meeting is due to finalise a four year plan to stabilise the battered economy, which will involve at least €15bn ($20bn) of spending cuts and tax increases – or about 10 per cent of annual economic output – from 2011 to 2014.
The plan is expected to be unveiled on Tuesday ahead of a critical by-election in Donegal South West where the ruling Fianna Fáil look set to lose, reducing the coalition’s majority to just 2 seats ahead of the crucial vote on December 7.
Local media reports suggested the plan will involve a 20,000 voluntary redundancies in the public sector, reductions in pension tax relief, the introduction of water charges, a household charge and cuts in the minimum wage, which is the second highest in the European Union after Luxembourg.
The government is anxious to release the plan ahead of any bail-out announcement, to emphasise to its domestic audience that the harsh fiscal adjustment has not been imposed by the IMF and European Union.
Mr Lenihan said the €6bn front-loading of the budget adjustment was “the figure that is being decided on by the Irish government in the best interest.”
The government’s beleaguered position was underlined by a poll in the Sunday Business Post by Red C that put Fianna Fáil on 17 per cent of first preference votes, less than half the level it achieved at the last general election in 2007.
But Mr Lenihan rejected opposition party calls for the government to resign and hold a snap election. “I do not think the Irish people should be plunged into a general election in the middle of such an economic crisis. It would be the height of irresponsibility to do that.”
The IMF and EU spent Friday in Dublin combing through the balance sheets of Ireland’s stricken banking sector as well as the public finances, with a view to determining how big the bail-out should be.
According to EU and Irish officials, the figure will be less than last May’s €110bn rescue of Greece, but will run into tens of billions of euros.
Klaus Regling, who runs the eurozone’s €440bn stabilisation fund for imperilled member states, said on Friday that the IMF and EU experts might need a full two weeks to finish their tasks – meaning that the bail-out might not be announced until December.
Antonio Garcia Pascual, economist at Barclays Capital, estimated the IMF-EU plan could involve €22bn-€37bn for restructuring and recapitalising Irish banks, plus about €60bn in contingency money to cover the Irish state’s funding needs between 2011 and 2013.
However, Irish and EU officials hope the announcement of a convincing IMF-European plan will drive down Irish government bond yields, allowing Ireland to return to debt markets and avoid the humiliation of drawing on emergency foreign loans.
Once the bail-out is agreed, it should take no more than eight days for the first funds to be transferred to Ireland, according to Mr Regling.
Even so, Dominique Strauss-Kahn, the IMF’s managing director, expressed frustration at the slow pace of the eurozone’s efforts to overcome its debt and banking sector troubles.
“The sovereign crisis is not over. The wheels of co-operation move too slowly. Repairing the financial sector is taking too long, in part because policymakers are not paying enough attention to the pan-European dimension,” he told a banking congress in Frankfurt.
In a move with potential implications for investors in other troubled European banks, a majority of bondholders in Anglo Irish Bank, the worst-hit Irish lender, gave initial support for a debt exchange offer that would make them take a loss on their bonds.
In Portugal, seen as the next most vulnerable eurozone economy after Ireland and Greece, there were growing signs on Saturday that José Sócrates, the prime minister, was preparing a cabinet reshuffle in an effort to re-energise his minority Socialist government, Peter Wise reports from Lisbon.
Three ministers made public comments suggesting that a reshuffle was being considered. Several Lisbon newspapers also ran stories saying cabinet changes were expected after parliament votes on the government’s 2011 austerity budget on November 26.
Luís Amado, foreign minister, is the most senior official expected to be replaced after he called for the centre-left Socialists to form a coalition government with the centre-right Social Democrats (PSD), the main opposition party – a proposal not endorsed by Mr Sócrates.
Ana Jorge, health minister, and Antonio Mendonça, public works minister, could also lose their positions, according to reports in Lisbon.
However, Fernando Teixeira dos Santos, the finance minister responsible for implementing Portugal’s tough austerity measures, is not expected to be replaced despite growing opposition criticism of his performance.
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