Vacant houses in Ireland.
(photo credit: ASSOCIATED PRESS)
DUBLIN — Debt-crippled Ireland has formally applied for a massive EU-IMF loan to stem the flight of capital from its banks, joining Greece in a step unthinkable only a few years ago when Ireland was a booming Celtic Tiger and the economic envy of Europe.
European Union finance ministers quickly agreed in principle to the bailout, saying it "is warranted to safeguard financial stability in the EU and euro area." But all sides said Sunday that further weeks of negotiations loomed to define the fund's terms, conditions and precise size.
The agreement gave a boost to the markets, with the Financial Times-Stock Exchange 100-share index up 0.7 percent in early trading Monday morning. Asian stock markets were mostly higher: Japan's Nikkei stock index was up 1.1 percent, South Korea's Kospi rose less than 0.1 percent and China's Shanghai Composite Index advanced 0.2 percent, but Hong Kong's Hang Seng index was down 0.4 percent.
Ireland's crisis, set off by its foundering banks, drove up borrowing costs not only for Ireland but for other weak links in the eurozone such as Spain and Portugal. Ireland's agreement takes some pressure off those countries, but they still may end up needing bailouts of their own.
The European Central Bank — which oversees monetary policy for the 16-nation eurozone and first raised alarm bells about a renewed cash crisis in Dublin banks — said the aid would "contribute to ensuring the stability of the Irish banking system." Sweden and Britain, not members of the euro currency, said they also were willing to provide bilateral loans to Ireland.
Ireland has been brought to the brink of bankruptcy by its fateful 2008 decision to insure its banks against all losses — a bill that is swelling beyond €50 billion ($69 billion) and driving Ireland's deficit into uncharted territory.
The country had long resisted a bailout, but Lenihan said it was now painfully clear that Ireland needed "financial firepower" immediately to complement its own cutthroat plans for recovery.
This country of 4.5 million now faces at least four more years of deep budget cuts and tax hikes totaling at least €15 billion ($20.5 billion) just to get its deficit — bloated this year to a European record of 32 percent of GDP — back to the eurozone's limit of 3 percent by 2014.
The European Central Bank and other eurozone members had been pressing behind the scenes for Ireland — long struggling to come to grips with the true scale of its banking losses — to accept a bailout that would reassure investors the country won't, and can't, go bankrupt.
The economically struggling governments of Spain and Portugal, in particular, had criticized Ireland's recent determination to keep going it alone. Ireland's inability to stop its financial bleeding has fueled investor fears of wider eurozone defaults and driven up those countries' borrowing costs on bond markets.
But even with Ireland seeking aid, financial analysts say Spain and Portugal remain on course for potential bailouts of their own. Spain is fighting Europe's highest unemployment rate and Portugal is seen as doing too little to restructure an unusually uncompetitive economy.
Ireland's move comes just six months after the EU and IMF organized a €110 billion ($150 billion) bailout of Greece and declared a €750 billion ($1.05 trillion) safety net for any other eurozone members facing the risk of imminent loan defaults. It demonstrates that creating the three-layered fund didn't, by itself, reassure global investors that it would be safe, or smart, to keep lending to the eurozone's weakest members.
Economists question whether the economies of Ireland, Portugal, Spain
and Greece will grow sufficiently to build their tax bases and permit
them to keep financing, never mind paying down, their debts. The euro,
however, has shown some resiliency in the tumult so far, remaining
relatively strong against the U.S. dollar.
fall has been tied to the fate of its overgrown banks, which received
access to mountains of cheap money once Ireland joined the eurozone in
1999. The Dublin banks bet the bulk of their borrowed funds on rampant
property markets in Ireland, Britain and the United States, a strategy
that paid rich dividends until 2008, when investors began to see the
Irish banking system as a house of cards.