Investors dumped Irish bank shares and Ireland’s government struggled to survive on Monday after conceding it will need a massive bailout aimed at containing Europe’s debt crisis.
Experts, however, said the Irish aid package would do little to shield other heavily indebted European countries from the risk of eventual default, most immediately Portugal but also potentially Spain, Italy and Greece.
Ireland’s rescue, which follows a Greek bailout in May, is the European Union’s latest attempt to win back market confidence and keep its 16-nation euro currency strong and stable. But the cost – both monetary and political – keeps rising by the day.
Irish Prime Minister Brian Cowen resisted calls from inside and outside his party on Monday to resign immediately and permit a snap election, despite signs that his coalition government’s razor-thin majority is unravelling.
Cowen insisted he would step down and face re-election only once Ireland’s most brutal budget in history is passed and ongoing negotiations with the International Monetary Fund and the European Central Bank produce a bailout deal expected to approach 100 billion euros ($A139.22 billion) – something only a week ago Cowen claimed his government wasn’t contemplating.
Analysts say Cowen faces an uphill struggle even to clear the first hurdle of the 2011 budget when it faces a vote after its unveiling Dec 7. Several MPs who normally back him are threatening to reject the budget – upon which the EU-IMF rescue mission depends – if cuts to pensions, welfare and medical services run deep as expected.
Cowen said Ireland can’t afford a three-week delay for a national election, so he couldn’t quit now no matter how badly the public wants him out.
“Any further delay in this matter would in fact weaken our country’s position,” Cowen said on the steps of his Government Buildings office, senior Cabinet ministers flanking him.
“The most important issue is the passing of this budget on the 7th of December,” he said.
“Not to proceed with it would do grave damage to our interests.”
Analysts agreed that Cowen faces almost certain removal within a few months at most, either by MPs within his own Fianna Fail party or by the junior party in his coalition government, the environmentalist Greens.
Green leader John Gormley stunned the rest of the government earlier Monday by announcing that his six MPs would pull their support from Cowen once the budget and EU-IMF talks were concluded.
He said this would mean a national election by late January.
Several Fianna Fail MPs then launched an evening rebellion against Cowen’s leadership during a closed meeting immediately before Cowen’s defiant declaration.
One lawmaker, Chris Andrews, said Cowen was a failed communicator who “no longer has the confidence of the people right across the country. We must put the country first.”
“The people do not trust him and do not believe what he has to say. His credibility is in tatters now,” said another, Noel O’Flynn.
To save its banks, Ireland has already said it needs 50 billion euros and, after a two-year struggle, has conceded it can’t fund this without EU-IMF help.
Amid rising disgust with Cowen’s handling of the crisis, activists from the Irish nationalist Sinn Fein party stormed the entrance to Cowen’s central Dublin office and scuffled with police.
Officers clubbed and shoved back protesters with their batons.
One officer had a bloody cheek following the melee.
Finance Minister Brian Lenihan said the bailout was necessary because Ireland’s banks have become wholly dependent on loans from the European Central Bank and, just like the government, are likely to be frozen out of normal credit markets for at least a year.
He said Ireland’s six banks, five of which are already nationalised or part-owned by the state, would be pruned, merged and possibly sold off.
“Because of the huge risks they (Irish banks) took earlier this decade, they became a huge risk not only to this state but to the eurozone as a whole,” he said.
Irish banks invested aggressively in runaway property markets at home and abroad. After the 2008 credit crunch sent property prices into freefall, the government tried to save the banks from bankruptcy by insuring all of their borrowings against default.
That unprecedented promise – made to retain investor confidence in the country – cannot be kept without a bailout, the government has finally been forced to concede.
Experts from the European Commission, the ECB and the IMF are in Dublin this week poring over the books of the Irish government and the banks.
The foreign bankers and accountants expect, as a condition for aid, that Ireland will pass the 2011 budget as the first stage of a wider plan for slashing 10 billion euros from spending and raising five billion euros in taxes by 2014. The austerity push is designed to shrink Ireland’s deficit to 3 per cent of GDP, the eurozone
limit, versus its current level of 32 per cent, a modern European record.
Cowen said the government would publish the four-year plan Wednesday, while parts of the 2011 budget wouldn’t come up for votes until the parliament reconvenes after a long Christmas break.
Such a schedule signals his intention to postpone an election until February or March.
The stock of Ireland’s two healthiest banks plummeted Monday in expectation of increased state involvement and forced mergers and divestments. Moody’s said it expects soon to slash the credit ratings of Ireland by two or more notches – to just above junk-bond status.
Ireland already has nationalised three banks, holds major stakes in Bank of Ireland and Allied Irish Banks, and will likely seize majority control of the latter next month. Only one bank, insurer and mortgage specialist Irish Life & Permanent, has avoided any bailouts so far.
Shares in Irish Life & Permanent fell 25 per cent to 0.86, Bank of Ireland 19 per cent to 0.39. Allied Irish – which already has sold its two prized foreign assets, stakes in Poland’s Bank Zachodni and New York’s M&T Bank – fell 6 per cent to 0.41.
Unions warned that overhauling the banks would mean thousands more lost jobs in Ireland, where unemployment has already reached 13.6 per cent, the second-highest rate in Europe after Spain.
Analysts cautioned that Ireland’s financial rescue was likely to provide little, if any, relief for Portugal and Spain, the next two potential dominos of Europe’s debt crisis.
“A bailout for Ireland does increase the chance that Portugal will tap the facility as well,” said Marco Valli, chief eurozone economist at UniCredit in Milan. “It will be a matter of time.”