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Ireland Applies For Bailout – IMF Plans Dramatic Spending Cuts

The Irish government will Sunday ask for the Cabinet’s approval of a financial bailout from the EU and the IMF, according to finance minister Brian Lenihan. The size of the emergency loan is still unknown. Irish financial politician Michael Noonan predict a dramatic call for spending cuts – all over the board – from the IMF.

“They’ll be looking for the dropping of programmes and a totally new way of delivering services to the public which will cost less with fewer people.”

Michael Noonan

Prime Minister Brian Cowen of Ireland

As the second EU member now prepares to be bailed out of its financial problems by the European Union and the International Monetary Fund, the IMF is getting more worried than ever and are planning a total spending overhaul.

Irish finance minister Brian Lenihan confirms that a formal application for an emergency loan from the EU/IMF is being drawn up.

The Irish Times reports that the Irish government will seek the Cabinet’s approval for the loan today, Sunday.

Following several days of negotiations with IMF/EU officials in Dublin, Mr. Lenihan says he would recommend that Ireland applies for an unspecified bailout loan.

Brian Lenihan

The minister also says he reviewed the negotiations last night and decided that the time was right to make an application for loans for both the State and the banking system.

In an  interview with RTÉ Radio Brian Lenihan says: “I will be recommending to the Government that we should apply for a program and start formal applications.”

He declined to be drawn on the exact size of the loan. When asked about the scale of the loan, Mr Lenihan confirm that the figures would be “tens of billions,” however  “nowhere near” the EUR 70 – 80 billion as indicated by economists and commentators.

The Irish minister points out that the interest rate charged on the loan has yet to be agreed on, but it will be signficantly lower than the rate currently available to the Government on international bond markets.

Mr. Lenihan also admits for the first time that the nation’s banks has become a too big a problem for the country to resolve on its own.

“The key issue all the time for the Government is to ensure that we do not have a collapse of the banking sector,” he says.

The euro zone finance ministers will conduct an emergency conference call Sunday evening to consider the Irish finance minister’s declaration.

According to The Irish Times, things are now moving quickly, and some believe the European authorities may seek to finalize a decision before the markets opens on Monday morning.

Predict Dramatic IMF Reform

In an interview with the broadcaster RTÉ’ earlier this week,  Fine Gael finance spokesman Michael Noonan, said that the IMF is planning a “fundamental restructuring of expenditure.”

Fine Gael is Ireland’s second largest political party, member of the European People’s Party – European Democrats Group and with representatives in the EU parliament.

The International Monetary Fund want “fundamental restructuring of expenditure and that’s where they’ll dictate, rather than on the specifics of the cuts”, the Fine Gael finance spokesman says.

“It’s not like slicing a salami or cutting the end off a cucumber,” Noonan says, adding that the IMF “wouldn’t probably specify a cut in the minimum wage but they’d say you have to get your labour market working properly.

“You have to do like they’re doing in the UK and ensure that work is always more valuable than welfare. And by setting the headlines and by indicating serious expenditure restructuring in a certain area the Government implementing has very few options.”

He believe a similar approach will be chosen to reform the public service sector.

The IMF had no interest in “taking a few civil servants out” here and there. “They’ll be looking for the dropping of programmes and a totally new way of delivering services to the public which will cost less with fewer people,” he says.

Mr. Noonan also predicated a “very dramatic” announcement shortly by the IMF, based on the way they operated in other countries.

He believe the first line of intervention by the IMF and other EU institutions would be the banking system rather than the government’s four-year budgetary plan and restructuring,  “which could be done very quickly,” and will be dealt with before anything else, The Irish Times writes.

He suggest the IMF might follow the “good bank/bad bank” formula used in the US where the good bank traded and took deposits and bad bank took the liabilities.

“It also took the creditors who had lent them money with senior debt and they had to work out their situation over years to get what they could out of it,” Noonan points out.

Last week Michael Noonan made the following statement in the Irish Dãli (parliament/House of Representatives):

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Bailing Out Ireland – The Inside Story

A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources says on Friday, but experts warns that a rescue may not be enough to prevent contagion in the single currency bloc. Still, the Irish government is hesitating.

“As long as the fundamentals don’t improve, the pressure will continue on other countries too.”

Daniel Gros


The euro rose and the risk premium investors demand to buy Irish and other peripheral euro zone debt – instead of benchmark German bonds – narrowed Friday as a sign of optimism that an aid deal for Dublin will be sealed soon.

But a poll of participants at a high-level banking congress in Frankfurt showed that nearly three-quarters believed the crisis that has shaken the euro zone for a full year would rage on even after an Irish rescue and ensnare other financially weak countries such as Portugal. Reuters reports.

“As long as the fundamentals don’t improve, the pressure will continue on other countries too,” Daniel Gros, heads of the Center of European Policy Studies, says in an interview with Reuters Insider TV.

“The problem is that no problems are currently being solved. Many believe that the euro zone is just moving from one crisis to the next.”

Ireland’s central bank chief has acknowledged that the country needs a loan running into the tens of billions of euros to shore up an extremely fragile banking sector that has grown dependent on ECB funds.

Time Is NOT On Your Side

Reflecting concerns among other euro zone periphery countries that Ireland’s financial troubles could spread, Greece’s finance minister, George Papaconstantinou. is  pushing Dublin to move fast.

“We are now at a point where decisions have to be taken,” he told bankers at a congress in Frankfurt. “Time is of the essence.”

Sources tell Reuters that Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

So why is the Irish government dragging its feet? Is it so embarrassed or fearful of risking sovereign control?

Or – is Ireland in fact in a position to reject an aid package from the EU or is it simply buying time?

Al Jazeera have just released this report, talking to Jim Rogers, among others:

 

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Fitch Comments On Irish Crisis

“As previously stated, Fitch Ratings says that its current Ireland sovereign rating of ‘A+’ with a Negative Outlook is premised on the Irish government’s commitment to fiscal consolidation, its strong liquidity position, improving external accounts and the measures it had taken to restructure the Irish banking system,” the agency writes in a statement.

Adding: “However, it is now evident that the actions taken in September have not succeeded in restoring confidence in the banking sector. Despite substantial injections of public capital into Irish banks and the extension of the issuance window for bank guarantees, Irish banks have been struggling to secure market funding and rollover existing debt, rendering them almost wholly reliant on ECB and Central Bank of Ireland liquidity support – some EUR130 billion and EUR35 billion respectively according to the latest available figures.”

While losses from commercial real estate lending appear to have been fully recognised with the transfer of related assets to NAMA (National Asset Management Agency) and additional capital injections into Irish banks announced on the 30 September, there is considerable uncertainty over the potential for further bank losses on other assets, including from residential mortgage lending, Fitch points out.

Official estimates suggest around 10% of residential mortgages are either in arrears or have rescheduled and continue to rise, though more positively, repossession rates remain relatively low.

To underpin continuing financial support for the banking sector and further measures to restore confidence, the Irish government is expected to agree an external financial support package with the EU and IMF in the near future.

“Fitch will review Ireland’s sovereign ratings in the light of any package agreed with the IMF and EU. The outcome of such a review will be influenced, amongst other factors, by the financial terms of any assistance provided and their fiscal implications; the agreed policy programme; and the likelihood that it would allow Irish banks and in particular the government to regain access to market funding at an affordable cost,” David Riley, Fitch’s Group Managing Director, writes.

 

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Europe On The Verge Of Another Full Blown Credit Crisis

Sovereign spreads widening to record levels Friday amid fears of defaults in the euro zone‘s periphery. As the weekend approaches, mixed messages from European leaders leaving the markets wondering what to believe. The credit market is now beginning to look a lot like it did in the first week of May, when Greek 5-year spreads were trading around 1.000 basis points as investors priced in the possibility that it would be the first country in the euro zone to fail to meet its debts, and the threat of contagion to its peripheral peers was very real.

“On the eve of the weekend the feeling of déjà vu in the credit markets is almost palpable.”

Gavan Nolan


But this time it isn’t Greece causing the turmoil. It’s all about Ireland, once lauded as the richest country in Europe, but now suffering the indignity of having its solvency questioned in the markets. Irish CDS spreads hit a record of 630 bp’s on Thursday morning and were subject to violent turbulence as a maelstrom of rumors hit the country which in turn projected on to the financial markets. As markets close Friday afternoon, investors are  in a state of unusual uncertainty.

The turbulence in the credit markets is fast approaching the record levels only seen in May earlier this year.

The volatility – and the rumors – continued to haunt the markets on Friday.

Spreads opened tighter due to a combination of short covering and a soothing statement from EU finance ministers. The announcement, made by Britain, Germany, France, Italy and Spain, clarified that any potential burden-sharing by bondholders would not take place before 2013, when the European Financial Stability Facility (EFSF) expires.

“Crucially, they also stated that bondholders’ participation would be voluntary and would not affect existing holders of debt,” credit analyst Gavan Nolan at Markit Credit Research writes the weekly update “Credit Wrap”.

Unsurprisingly, spreads rallied after the announcement.

However, the real impetus for the spread tightening came once again from the rumour mill:

Sevrel reports buzzed through the markets hinting that an EU bailout for Ireland was imminent. This was quickly denied by the Irish finance ministry.

Spreads came of their tights after the denial but held on to most of their gains. But that wasn’t the end of it.

New reports emerged in the afternoon suggested that a bailout was indeed being planned in the next few days. And again, the Irish government was forced into a rapid rebuttal, stating that it had not requested aid from its EU partners.

“Nonetheless, Ireland’s spreads finished the day at 540bp, some 55bp tighter. The volatility throughout the day was indicative of dealers’ unwillingness to hold on to large positions going into the weekend – memories of May haven’t faded yet,” Nolan comments.

Other peripheral sovereigns, and Portugal in particular, were moving in tandem with Ireland.

The Markit iTraxx SovX Western Europe index was 8.5bp tighter at 168bp, its largest one day gain for some time. But it is still over 30bp wider than levels this time last month, and its underperformance versus the Markit iTraxx SovX CEEMEA – an emerging markets index – is marked over recent months.

“Both indices trade with a large skew, and if this is taken into account the convergence between the two indices is even closer,” the credit analyst points out.

This reflects the stronger fundamentals of eastern European sovereigns compared to the profligate and fragile EU members on the Mediterranean and Atlantic, he explains

“Today the western European index recovered some ground. Whether this trend can be maintained will depend on the EU’s decisions over the coming days,” Gavan Nolan concludes.

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