Debt-struck Ireland on Sunday formally appealed 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 to the bailout, saying it "is warranted to safeguard financial stability in the EU and euro area."
Irish Finance Minister Brian Lenihan spent much of the night talking to other finance chiefs across the 16-nation eurozone about the complex terms and conditions of the emergency aid package taking shape.
Lenihan said Ireland needed less than €100 billion ($140 billion) to use as a credit line for its state-backed banks, which are losing deposits and struggling to borrow funds on open markets. The money will come from the EU's executive commission and a financial backstop set up by eurozone nations earlier this year. There may also be additional bilateral loans from countries outside the eurozone.
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.
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. Those fears have been driving up the already inflated borrowing costs of several eurozone members, particularly Portugal and Spain, on bond markets.
Still, the rapid pace of Sunday's humiliating Irish U-turn surprised many analysts. More than 30 banking experts from the International Monetary Fund, ECB and European Commission had arrived in Dublin only three days before to begin poring over the books and projections of the government, treasury and banks, a mammoth task expected to take weeks.
But Lenihan said it was now painfully clear that Ireland couldn't go it alone any longer, and its cutthroat plans for recovery would require a major shot of "financial firepower" immediately.
Lenihan said Ireland was asking eurozone and IMF donors to loan money to a "contingency" fund from which Irish banks could borrow. He said the funds would "not necessarily" be used. He emphasized that the government's own operations are fully funded through mid-2011.
"Not all the money will go in (to the banks) at all. It's a standby fund," Lenihan told Irish state broadcasters RTE.
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.
The United Kingdom, the country with the most exposure to Ireland's banks, reiterated Sunday it was ready to help fund Ireland's loan facility. The U.K. Treasury said in a statement it was in "Britain's national interest" to revive Ireland's banks and that it would be "closely involved in discussions on the scale and type of assistance."
Ireland's precipitous 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 its 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.
When the most reckless speculator, Anglo Irish Bank, faced bankruptcy in September 2008, it and other Irish banks persuaded Lenihan and aides that they faced only short-term cash problems, not a terminal collapse of their loan books.
Lenihan announced that Ireland would insure all deposits — and, much more critically, the banks' massive borrowing from overseas investors — against any default, an unprecedented move.
At the time, Lenihan billed his fateful decision as "the cheapest bailout in history" and claimed it wouldn't cost the Irish taxpayer a penny. The presumption was that confidence would return and Ireland's lending would resume its runaway trend.
But two years later, Lenihan had already nationalized Anglo and two other small banks and taken major stakes in the country's two dominant banks, Allied Irish and Bank of Ireland. The flight of foreign capital was accelerating again amid renewed doubts that the government understood the full scale of its losses.
Lenihan and the Irish Central Bank responded by estimating the final bill at €45 billion to €50 billion ($62 billion to $69 billion). But investors resumed their withdrawal from Irish banks and bond markets in mid-October, driving up the borrowing costs for Portugal and Spain, which face their own deficit and debt crises.
Economists increasingly doubt that 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 first portion of Ireland's loan might come from the European Commission, the EU's executive. After that, the Washington-based IMF and a facility funded by eurozone nations could raise money in bond markets.
When Irish Prime Minister Brian Cowen gathered his 15-member Cabinet together for a rare Sunday meeting, his aides briefed reporters that the main topic would be approval of Ireland's four-year austerity plan. It has been in the works since September and seeks to close the gap between Ireland's spending, currently running at €50 billion, and depressed tax revenues of just €31 billion. It proposes the toughest steps in the 2011 budget, when €4.5 billion will be cut from spending and €1.5 billion in new taxes imposed — steps that threaten to drive Ireland's moribund economy into recession and civil unrest.
Both Cowen and Lenihan have stressed that Ireland's 12.5 percent rate of tax on business profits — its most powerful lure for attracting and keeping 600 U.S. companies based here — would not be touched no matter what happened. France, Germany and other eurozone members have repeatedly criticized the rate as unfair and say it should be raised now given the depth of Ireland's red ink.
The 2011 budget faces a difficult passage through parliament when it is unveiled Dec. 7. Cowen has an undependable three-vote majority that is expected to disappear by the spring as byelections, or special elections, are held to fill seats.
Cowen and his long-dominant Fianna Fail party are languishing at record lows in opinion polls. The latest survey published in the Sunday Business Post newspaper said Fianna Fail has just 17 percent support, whereas the two main opposition parties, Fine Gael and Labour, command 33 percent and 27 percent respectively. Those two parties are widely expected to form a center-left government after Cowen loses his majority, which would force an early election.
Reflecting the national mood, the Sunday Independent newspaper displayed the photos of Ireland's 15 Cabinet ministers on its front page, expressed hope that the IMF would order the Irish political class to take huge cuts in positions, pay and benefits — and called for Fianna Fail's destruction at the next election.
"Slaughter them after Christmas," the Sunday Independent's lead editorial urged.