Irish government backs bail-out

BBC News (Link) (November 21, 2010)

The Republic of Ireland will make a formal request for international aid to shore up its finances later on Sunday.

Finance minister Brian Lenihan put no figure on how much may be borrowed, but told RTE radio it would be �tens of billions� of euros.

BBC business editor Robert Peston said the request to the European Union and International Monetary Fund (IMF) would not be refused.

The government is finalising a four-year plan to cut its budget deficit.

Details were set to be thrashed out at a cabinet meeting on Sunday, and only after this budget is approved by the potential lenders, could the bail-out go ahead.

Mr Lenihan said: �I have no doubt the plan will be convincing.�

�Damaging impact�

The country has been coming under pressure from European neighbours to apply for the funding - which they hope will ease pressure on other eurozone members facing mounting debts and deficits.

However turning to the EU and IMF for help is a turnaround for the Irish government, which earlier this week denied such a package was being negotiated or was necessary.

European Union finance ministers were to hold a conference call to address the imminent bail-out request.

The Republic is currently spending about 19bn euros (�16bn; $26bn) more than it receives in taxes and revenues, but its crisis-hit banks also need a massive injection of back-up funds.

The Sunday Times speculated that the Republic�s bail-out package would be worth up to 120bn euros.

This compares with the 110bn euros Greece is set to receive over three years.

However, Mr Lenihan said the total would �not be three figures.�

He added that the �bulk of the money� would be �a contingency fund which stands behind the banking system� and said that any money borrowed would be at far lower rates than the country could get on the money markets.

The finance minister added that it would not be a condition of the external assistance that it raised the country�s corporation tax rate, which stands at 12.5% - much lower than the EU average.

The Sunday Telegraph reported that some of the biggest US companies had warned the Republic of the �damaging impact� if the corporation tax was raised.

Microsoft, Hewlett Packard, Merrill Lynch and Intel were among those to warn of the risk to the country�s �ability to win and retain investment,� the paper said.

However the Irish four-year budget plan will include dozens of proposals to bolster the country�s balance sheet.

Reports suggest that these will include a property tax worth about 500 euros per home, and a wealth tax on the richest in the country.

A string of further public sector spending cuts is also expected, while the minimum wage may also be reduced.

UK impact

While the UK is not part of the eurozone, its taxpayers will end up footing some of the bill for the bail-outs.

For example, the UK contributes 12% to the European Financial Stability Mechanism (EFSM) - one of the funds the Irish government may draw on.

Also, the UK is committed to funding 4.5% of any aid from the IMF.

And the BBC�s business editor said UK chancellor George Osborne was also considering a direct loan to the Irish government.

The Republic is among the UK�s largest trading partners and tough times could mean less demand for UK goods and services.

Two key areas will form the basis of the cabinet�s discussions of the four-year plan, says BBC business correspondent Joe Lynam - the country�s precarious fiscal situation which has pushed the budget deficit to 32% of gross domestic product, and how best to prop up the country�s enfeebled banking sector which has been frozen out of international markets and all but nationalised.

Bank focus

The Sunday Telegraph also reported that advisers for the Irish government had been talking to banks it felt may be in a position to buy large stakes in either Anglo Irish Bank or Allied Irish Bank - in both of which the government holds stakes.

On Friday, Allied Irish Banks said 13bn euros of deposits had been withdrawn this year, mostly from businesses and institutions - implying that the bank does not face a run by ordinary depositors.

Although the Irish government claims to be fully funded until the middle of next year, it has provided a blanket guarantee to the Irish banks, some of whom are now finding it impossible to borrow money in the markets.

On Thursday, the Irish government admitted for the first time that it may need outside help.

Previously the government had said it did not need any financial support from the European Union and IMF. �