By Anthony Faiola
Monday, November 29, 2010; A06
BERLIN - Ireland on Sunday reached agreement with the International Monetary Fund and the European Union for an emergency bailout package worth $90 billion, a rescue meant to both shore up that nation's buckling banks and confront investor fears that Dublin's problems are spreading to other European nations.
It remains unclear, however, if the deal would be enough to restore market confidence in other debt-laden E.U. nations, including Portugal and Spain, that have come under attack by investors in recent weeks and risked a run on the euro.
As part of the package, European financial chiefs agreed that investors, thus far shielded from losses in Ireland and Greece, which received a bailout in May, might need to take losses in future debt crises. Attempting to blunt market fears, however, they said such losses would not be automatic and would only happen in extreme circumstances.
By agreeing to the bailout terms, the cash-strapped government in Ireland will be given fresh resources to recapitalize its hard-hit banking sector. Saddled with bad loans from a U.S.-style real estate bust, Irish banks have come under enormous pressure, with fearful depositors pulling out billions in recent months.
But in return for the loans, Ireland was forced to pay a relatively hefty 5.8 percent interest rate, higher than the 5.2 percent charged to Greece for its $145 billion bailout. In addition, Ireland will need to slash billions from its budget to save cash and had to promise to tap $23 billion in reserves from its own pension funds before it accesses the new lifeline.
The tougher terms appeared to be a warning to other financially troubled nations in Europe that they would have to pay an increasingly higher price for help if they could not manage to restore market confidence on their own.
Nevertheless, Irish Prime Minister Brian Cowen on Sunday told reporters that his desperate nation had no choice but to accept the deal.
"If we didn't have this program, we would have to go back to the markets, which as you know are at prohibitive rates," Cowen said. "We would pay far more."
Officials in Brussels, where financial chiefs from the 16 nations that use the euro inked the deal, optimistically said it would restore market confidence.
The Irish bailout "should address the current nervousness in the financial markets," European Union Economic Commissioner Olli Rehn told reporters in Brussels.
The rescue will see the E.U. putting up $60 billion and the Washington-based IMF an additional $30 billion. In a statement, IMF Managing Director Dominique Strauss-Kahn said the deal would see a broad restructuring of once high-flying Irish banks.
"A fundamental downsizing and reorganization to restore the viability of the system will commence immediately," Strauss-Kahn said. "At the end of this process, a . . . better capitalized banking system will emerge to effectively serve the needs of the Irish economy."
Importantly, the E.U. chiefs also agreed that future bailouts would not require bondholders to take an automatic loss on their investments, an idea that had been floated by the Germans. Rather, the E.U. would study each instance on a case-by-case basis and put bondholders at risk only if a country was in such bad shape that it was deemed "insolvent," or so fiscally far gone that even a bailout would not be enough for it to avoid a default on its obligations. The policy would not come into effect, they said, until 2013.
Analysts said that while the bailout marked a step forward, it may not be enough to calm fears that Irish and Greek woes would keep spreading to other countries in Western Europe that are also heavily indebted and running high budget deficits.
Special correspondent Rebecca Omonira-Oyekanmi contributed to this report from London.