Shares in Ireland’s banks rose sharply as markets were encouraged by the bailout’s immediate focus on injecting 10 billion euros into the cash-strapped banks out of a total of 67.5 billion euros ($89 billion) in loans.
But the Irish were shocked by a key condition for the rescue — that Ireland use 17.5 billion euros of its own cash and pensions reserves to shore up its public finances, burdened by bailing out banks’ irresponsible risk-taking.
Opposition leaders and some economists warned that the EU-IMF credit line’s average interest rate of 5.8 percent would be too high to repay — and questioned why the senior foreign bondholders of Ireland’s struggling banks still weren’t being asked to help bear the cost.
“This is not a rescue plan. It is the longest ransom note in history: Do what we tell you and you may, in time, get your country back,” said Fintan O’Toole, a commentator and author who led a weekend protest by labor-union activists in central Dublin against the imminent bailout. He called the average interest rate being demanded “viciously extortionate.” The mood on Dublin’s snow-covered streets was just as icy.
“We’ve been screwed by the IMF. It’s going to be years and years until we’re free of this,” said Paul Flood, an unemployed 53-year-old Dubliner. “We have to use our own pension reserve, and we’re still being stung with a 5.8 percent interest rate. It sounds ridiculously high.” But the senior International Monetary Fund negotiator, Ajai Chopra, insisted that Ireland’s interest bill was reasonably cheap and its redeployment of Irish pension funds the most cost-efficient course to take.
Chopra said Ireland now was well positioned to reassure investors and eventually resume normal borrowing once interest rates being demanded on open markets fall.
“This is a very good deal for Ireland in current circumstances,” said Chopra, who arrived in Dublin 12 days ago to oversee negotiation of a bailout deal that leaders of all 27 EU nations approved Sunday at an emergency Brussels meeting.
“It’s clearly much better than what Ireland could get if it had to borrow on the market right now. ... As the program begins to work, we would expect that Ireland would be able to go back into the markets and borrow again,” he said.
The yields on Ireland’s 10-year bonds eased slightly Monday to 9.14 percent. They reached a euro-era record high of 9.24 percent Friday.
The euro currency initially gained but then dropped back as investors remained unconvinced that the Irish deal would soothe wider fears of eventual debt defaults somewhere else in the 16-nation euro zone.
Bond yields rose for Portugal, Spain and Italy, the other three euro zone members whose debt financing needs most worry economists. The 10-year bond yields for Greece — the highest in the world since its own EU-IMF bailout in May — dipped to 11.69 percent.
Chopra said it was smart to require Ireland to use its long-term pension money, which was earning around 1 percent interest, to reduce a bailout bill costing far more to finance.
“It’s making the best use of the money that Ireland has set aside. It’s a sign of strength,” Chopra told Irish state broadcaster RTE.
Ireland’s three publicly listed banks surged on the Irish Stock Exchange following Sunday’s deal.
After an immediate 10 billion euros to boost the banks’ cash reserves, the EU-IMF deal offers 25 billion euros more to draw down if banks still have trouble borrowing on markets.
Irish Central Bank Gov. Patrick Honohan said the fund would allow the capital ratios of Irish banks to rise to 12 percent, better than the international standard of 8 percent. This means each bank will be required to keep on deposit at least €12 for every 100 euros in loans it has on its books.
The remaining 50 billion euros of the bailout loans is earmarked for use to cover Ireland’s expected deficits through 2014.
The European Commission also approved the transfer of more toxic property-based loans to Ireland’s year-old state “bad bank,” which has already taken charge of hundreds of Irish construction sites, office blocks and housing developments gone bust since the 2008 collapse of the property-driven boom.
Ireland faces at least a four-year fight to restore its deficits to the euro zone limit of 3 percent of GDP from its currently post-war European record of 32 percent.
The government of Prime Minister Brian Cowen last week unveiled a four-year plan to impose 10 billion euros in cuts and 5 billion euros in new taxes in this country of 4.5 million. The harshest cuts loom in the 2011 budget to be unveiled Dec. 7.
Crucially, the government estimates that Ireland’s economy can manage tepid growth in the midst of unprecedented austerity.
The European Commission is clearly less convinced. It offered Ireland a one-year extension to 2015 to reduce its deficit back within euro zone rules, and published economic projections that are less optimistic than Ireland’s own.
The commission expects Irish GDP to grow 0.9 percent next year and 1.9 percent in 2012. Ireland’s deficit-fighting plan is based on expectations of 1.75 percent and 3.25 percent growth.
Chopra says IMF and EU experts in coming weeks will subject each Irish bank to a series of stress tests including worst-case scenarios to determine how much cash they need.
Chopra declined to explain what could be done if Ireland had trouble repaying its loans and needed more help.
Ireland has already committed at least 45 billion euros to bailing out five banks, a bill the government was forced to concede in recent weeks it could no longer finance on its own.
Shares in Irish Life & Permanent — the only bank yet to receive any rescue cash — rocketed 42 percent on the open off its record low Friday. The bank, a specialist in insurance and residential mortgages, said Monday it doesn’t require any state aid.
Bank of Ireland jumped 23 percent as it announced plans to try to raise 2.2 billion euros to avoid resorting to the latest bailout. Analysts expect the Bank of Ireland to require state help to raise the cash, but fears are ebbing that the aid would drive the government’s 36 percent stake in the bank into majority ownership.
Allied Irish Banks rose 7 percent, reflecting its humbled status as much more reliant on bailout funds and likely to face virtual nationalization soon.
Some economists condemned the EU-IMF deal as designed to shackle the losses of Irish banks to taxpayers, rather than pass any losses to senior bondholders — chiefly other banks in Britain, Germany and the United States.
“We have a choice between the solvency of the state and the solvency of the banks. We needed to sever those links. This deal instead has soldered the links between the banks and the state,” said David McWilliams, a former Irish Central Bank economist who has argued in vain for Ireland to force senior bondholders to share losses.
“Of course the bank shares will rise,” he said of Monday’s sharp gains. “We’ve just put 10 billion in their pocket.”
