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Ireland to prune its banks as part of bailout

Ireland's banks will be pruned down, merged or sold as part of a massive EU-IMF bailout taking shape, the government said Monday.
Image: eople walk past a branch of the AIB bank on Merrion Row in Central Dublin
People walk past a branch of the AIB bank in Central Dublin. Ireland's banks will be pruned down, merged or sold as part of a massive EU-IMF bailout taking shape, the government said Monday.CATHAL MCNAUGHTON / Reuters
/ Source: news services

Ireland's banks will be pruned down, merged or sold as part of a massive EU-IMF bailout taking shape, the government said Monday as a shellshocked nation came to grips with its failure to protect and revive its banks.

Crucially, some experts say the rescue may have come too late to save the next weak link, Portugal, from a similar fate. Ireland's crisis also appears likely to force the early departure of its deeply unpopular government, calling into doubt the credibility of Prime Minister Brian Cowen's four-year austerity plans.

Cowen defied calls to resign on Monday, vowing to stay in power long enough to pass an austerity budget needed for an EU/IMF bailout package, and then call an early election .

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, look likely to be frozen out of normal credit markets for at least a year.

The banks invested aggressively in runaway property markets at home and abroad for a decade and were hit hard when the bubble burst. The estimated cost of bailing them out has been repeatedly raised beyond €50 billion — too big for the Irish to finance at a time when they were being pushed out of bond markets.

The shock of Ireland's decision to seek a bailout, after weeks of denying it needed one, has proved too much for the fragile government.

The junior member of the coalition, the Green Party, stunned Cowen and his Fianna Fail party by announcing Monday they want parliament dissolved in January for an early election. A Green withdrawal would destroy Cowen's three-vote parliamentary majority.

Green Party leader John Gormley said his party would support Cowen through the Dec. 7 vote on the 2011 budget as well as the related four-year plan and the expected flow of the bailout money in coming weeks. However, he expected Fianna Fail to concede Ireland needs a new government.

"Leaving the country without a government while these matters are unresolved would be very damaging and would breach our duty of care," Gormley said. "But we have now reached a point where the Irish people need political certainty to take them beyond the coming two months."

The Greens' six lawmakers since 2007 have propped up Fianna Fail, which has been hoping to cling to power until 2012.

Earlier, Lenihan stressed that Ireland has no plans to force senior bondholders of the five state-supported banks to absorb losses, as Germany insists will happen under new EU rules to be enacted in 2013.

"We've always acknowledged as a sovereign state that we pay our senior debt. I've not seen any push to have senior debt dishonored," he said.

Europe's stock markets and the euro initially rose in relief that a long-rumored bailout would finally happen, but reversed course in the afternoon as the focus switched to wider unresolved problems across the eurozone. The cost of borrowing for the most debt-burdened eurozone members — Portugal, Ireland, Italy, Greece and Spain — all dipped modestly on bond markets.

The stock of Ireland's two healthiest banks plummeted in expectation of increased state involvement and forced mergers and divestments. Ratings agency 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 nationalized 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.

Alan Dukes, chairman of Anglo Irish Bank, said he expected most, if not all, of Ireland's six banks to end up in state hands. Unions have warned of probable mass job cuts — the unemployment rate of 13.6 percent is already the second-highest rate in the eurozone behind 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."

Valli said he was more optimistic that Spain could avoid an EU-IMF intervention, citing the strong performance of Banco Santander and Spain's other major banks.

But Marc Ostwald, senior strategist at London-based Monument Securities, compared the bond markets to "hearse chasers" who soon would "take Portugal and Spain to task."

Ostwald said global investors have little confidence that eurozone governments have contained their debt difficulties "given that the leaders of the eurozone have once again failed to act pre-emptively, but rather only when the clock is set at 1 minute to midnight."

Portugal's finance minister, Fernando Teixeira dos Santos, insisted the Irish bailout would lower his own country's cost of borrowing back to sustainable levels. He said Portuguese banks were sound, and an emergency budget due to be passed Friday would lower the deficit from 9.3 percent this year to 4.6 percent in 2011.

Lenihan reiterated that the rescue loan will not exceed €100 billion ($137 billion). But he said the figure would become clear only after another week or two of negotiations with the IMF, the European Commission and the ECB. EU officials said the rescue talks could be completed by the end of November.

Lenihan said he agreed that the Irish banks needed to be cut down to size and refocused purely on domestic activities. Most of their remaining foreign assets "will have to be discarded," he said.

"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.

EU foreign ministers gathered in Brussels said they had no real choice but to help Ireland because, just like Greece in May, the eurozone cannot allow one of its members to default.

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"We are in this boat together and we will find a solution to this crisis together," said Finnish Foreign Minister Alexander Stubb. "The reason is very simple — we cannot afford to leave one single country alone."

Both Sweden and Britain offered bilateral loans even though they aren't in the eurozone. Britain is Ireland's No. 1 trading partner and British banks are even more exposed than eurozone kingpin Germany to the borrowings of Dublin banks.

Nonetheless, the willingness of European governments to lend to Ireland is already causing disquiet across a continent where all governments are struggling with finances. Britain just passed its toughest austerity budget since the 1970s, when it was recovering from its own IMF bailout.

Lenihan said Ireland still has more than €20 billion in reserves and hopes it can emulate South Korea, which got an IMF bailout in 1997 and returned to borrowing from open markets a year later.

"We're not bust. We have substantial cash reserves and the EU recognize that," he told Irish state broadcasters RTE. He emphasized that Ireland hoped to keep as much of the EU-IMF loans on deposit as possible, because that could encourage normal lending at lower rates to resume sooner rather than later.

The EU-IMF fund taking shape would "demonstrate that Ireland has facilities available to it to enable it to go to the market ... that Ireland has a last resort," he said.

Analysts said Ireland's evolving bailout demonstrated that Europe must do much more to demonstrate its competence in capping the crisis. The eurozone in May created a €440 billion fund called the European Financial Stability Facility, or EFSF, that will be a chief source for Irish support.

"There can be no denying that Europe has taken a significant credibility blow by having to activate the EFSF. Its chief, Klaus Regling, stated on many occasions that the EFSF would never be activated and that the mere knowledge of there being a safety net in place would be enough to stabilize the eurozone debt markets," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi.

"So the EFSF has already failed based on what the original objective was."