By Anthony Faiola and Howard Schneider
Washington Post Foreign Service
Wednesday, November 17, 2010; 12:40 PM
DUBLIN - A top British finance official said Wednesday that his country would help prop up Ireland's ailing finances - even as a team from the International Monetary Fund and European Union prepared to travel here to address the crisis and the Irish government signaled, for the first time, that it might be willing to accept a bailout.
Confronting a massive budget deficit and roiling banking crisis, Ireland has been resisting calls from leading E.U. nations to calm markets by accepting an international rescue, seeing a bailout as a national embarrassment.
But early Wednesday from Brussels, where European financial chiefs were holding talks, Irish Finance Minister Brian Lenihan appeared to concede the nation might need aid. He said the "short, focused consultation" with IMF and E.U. officials in Dublin this week might result in international support for the Irish banking system.
"Despite a large range of measures adopted by the government, Ireland is a small country, and if the banking problems in the country are too big for this small country to manage, Europe is making it clear that they will help and help in every possible way to secure the system because we are part of the euro system," Lenihan told Irish radio.
Also in Brussels, British Chancellor of the Exchequer George Osborne told reporters that the United Kingdom "stands ready" to assist its debt-saddled neighbor.
Although the United Kingdom does not use the euro, economic ties between the two nations are so close that it is important for Britain to assure Ireland's stability, Osbourne said as he joined the crisis talks.
Although the main financial support for Ireland probably would come from the other 15 countries that use the euro, as well as the IMF, overnight reports from Europe indicated that Britain was considering its own line of financing to help with a rescue plan.
"Ireland is our closest neighbor, and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," Osborne said. "So Britain stands ready to support Ireland in the steps that it needs to take to bring about that stability."
However, Irish Prime Minister Brian Cowan continued to play down the possibility of a rescue as he faced his critics in parliament, who have accused him of misleading the nation by denying bailout talks were taking place.
Cowan has acknowledged that Ireland can no longer afford to borrow on world markets because it must pay such high interest rates. But he continues to insist that Ireland does not need a bailout. Instead, he portrayed the talks as a general consultations that might not yield a financial lifeline, saying "there has been no question, as has been stated all over the weekend, of a negotiation for a bailout."
In refusing to request a bailout, observers say, Cowan might be staking out a stronger bargaining position for negotiating terms of a rescue proposal that could range up to $100 billion or more.
But analysts say the already unpopular prime minister is risking what little political capital he has left, as well as already flagging public trust in the government, by appearing to deny that rescue talks are underway even as the IMF and E.U. team are headed here.
Sources familiar with the talks say Cowan is desperate to avoid a deal that his political opponents could deem a "bailout." That is one reason why Irish officials might seek a temporary lifeline to recapitalize their banks, rather than a broader, multi-year bailout like the one offered to Greece earlier this year.
But the sources said it is not yet clear whether markets would accept the more limited approach.
The emergency talks in Brussels began Tuesday, with some European officials suggesting that an aid package for Ireland could be on a fast track in hopes of reassuring markets that Europe is prepared to stand behind the finances of its weakest members.
As doubts surfaced about how an international fund established this year to help beleaguered European economies would work in practice, European officials said that in seeking to rescue Ireland they were fighting for the very future of the European Union.
The latest turbulence highlights the apparent weakness of efforts taken in response to a similar debt crisis in Greece six months ago, which were aimed at reassuring investors that Europe's weakest economies would be protected from default.
The $1 trillion fund set up in May by the Europeans and the International Monetary Fund was designed to calm fears that could unsettle world financial markets and undermine the global economic recovery.
European stocks mostly rose Wednesday, suggesting that investors were reassured by Britain's support and the IMF and E.U. action. In the United States, markets rose slightly in the hours after the opening bell.
The 16-nation euro currency zone is beset by fissures between strong economies such as Germany and weaker ones such as Greece, Ireland and Portugal, which risk being engulfed by historic levels of government debt.
European Union Council President Herman Van Rompuy has warned of "a survival crisis" for the currency union and the E.U.'s broader experiment in economic and political integration.
With the economic recovery flagging, U.S. Treasury Secretary Timothy F. Geithner called on European leaders Tuesday to take urgent action.
"You want to make sure you move very, very quickly and you have a combination of policy reforms that help resolve the underlying problem, with some temporary financial support to help countries manage through them," Geithner said at a symposium sponsored by the Wall Street Journal.
Schneider reported from Washington. Staff writer Neil Irwin contributed to this report.