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E.U. nations consider Irish bailout to calm markets

By Anthony Faiola
Washington Post Foreign Service
Tuesday, November 16, 2010; 2:57 AM

European Union officials are hashing out a possible $100 billion aid package for Ireland to help shore up that nation's devastated banking sector, even as Irish officials continue to deny that the financially troubled nation needs a bailout.

European financial chiefs were set to meet in Brussels on Tuesday and Wednesday, with aid for Ireland topping the agenda following inconclusive talks Sunday over a possible emergency financial lifeline.

Some European officials argue that Portugal, whose cash-strapped government and small economy are under fire from investors, may also need a bailout to avoid a widening crisis that could potentially destabilize the euro and threaten the global economic recovery.

Investors are fretting that heavily indebted Ireland, still struggling to contain a roiling banking crisis, might not be able to repay the billions it has borrowed in the form of government bonds. Those fears have sparked panicked selling of Irish bonds in recent weeks, and some European officials see a deal to shore up Ireland as vital to preventing a broader crisis of confidence from engulfing other weak and debt-mired economies in Western Europe. Fears are particularly high that investors' panic could spread to one of the region's larger economies, such as Spain or Italy.

Speculation that a deal might be reached helped ease pressure on Irish and other European bonds Monday, further bouncing back after a recovery Friday. But officials in Ireland - where a bid for international aid is being seen as a national embarrassment - again denied that they need a rescue. They stressed that Ireland has already borrowed enough cash to keep the government running through the middle of next year, meaning that Dublin does not need to tap the markets for fresh cash for months.

Irish officials argue that they can restore market confidence on their own with a new round of austerity measures to be outlined during the next few weeks. The measures would cut Ireland's record budget deficit back down to sustainable levels. Without the austerity plan, Ireland's deficit is on course to be worse than the one in Greece, which was bailed out by the E.U. and the International Monetary Fund last spring.

But sources familiar with the talks say the Irish might try to craft a deal with the E.U. for a more targeted aid package aimed at propping up its troubled banking sector, which has been buckling under the weight of a devastating real estate bust in the wake of the global financial crisis.

A more targeted rescue might limit the kinds of demands the E.U., and potentially the IMF if it joins in a rescue deal, would make on the Irish. In particular, the Irish are desperate to keep their famously low corporate tax rate of 12.5 percent as an incentive for multinationals to relocate there. Irish leaders fear that European powers such as France and Germany, who have long been critics of that policy, might try to force Dublin to increase the corporate rate as part of a bailout.

Publicly, officials in Germany and France have said they are not seeking to pressure Ireland to accept a deal. On Monday, French Finance Minister Christine Lagarde said that at the moment, "there is no request for aid" from Ireland.

But privately, European officials said they are worried that Ireland's situation could erode during the next several months, just as Greece's did earlier in the year, and spark yet another run on the euro and a deeper crisis in European bond and stock markets.

Concern is also growing about the increasing reliance of troubled Irish banks on the European Central Bank to keep them liquid, given that few commercial lenders are willing to do business with the Irish institutions. Asked Monday whether Ireland should be encouraged to accept a bailout, ECB Vice President Vitor Constancio told reporters that officials in Dublin had not made a request for aid. But help could be offered, he said, through an emergency fund set up by the E.U. after the Greek bailout to rescue other financially troubled member nations that share the euro.

Aid "is available, and the situation of Ireland has been examined and studied by all the involved entities in Europe. So I would say the instrument is ready and now it's up to the Irish authorities," Constancio said.

Other European officials said no consensus had been reached on whether, or when, to bail out Ireland. Some critics, for instance, argued that aiding Ireland now would simply send a message to the markets that the E.U. is willing to throw money at any member nation that gets into hot water with investors.

In addition, public sentiment in Germany - by far the largest and strongest economy among the 16 nations that use the euro - was strongly against the bailout for Greece, making an Irish bailout now politically risky for Chancellor Angela Merkel.

Underscoring the region's fragile fiscal situation, the European statistical agency reported Monday that Greece's budget deficit was significantly worse than originally thought, meaning the government in Athens will be forced to impose even sharper budget cuts or work out an extended rescue deal with the E.U. and IMF.

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