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Ireland Requests EU/ECB/IMF Funding. Major Conditionality on Banking Structure

Over the weekend, Ireland eventually submitted formal application for financial assistance from the EU. This was welcomed by European financial ministers. As stated in the statement by the Eurogroup and ECOFIN, ministers believed that providing assistance to Ireland is ‘warranted to safeguard financial stability in the European Union and in the euro area’. While further details have not been disclosed, the program will be around 80-100B euro and Ireland should not need to seek external funding in coming 3 years. If that’s the case, it would be slightly smaller than the EUR110bn package provided for Greece in April. Concerning conditions for the funds, as Ireland stressed that corporate taxes will not be raised, the focus will probably be on banking sector restructuring.
 
Irish Finance Minister Brian Lenihan said on Sunday that the country would seek ‘contingent’ funding from the EU and the IMF as ‘the banks were too big a problem for the country’ and ‘the key issue all the time for the government is to ensure that we do not have a collapse of the banking sector’.

It's true that Ireland is funded until next summer with a cash buffer of 20B euro. The country may also tap fund from the National Pension Fund Reserve to recapitalize banks. However, the current situation indicates Ireland is increasingly likely to seek help from the EU and the IMF because market confidence has gone. Recall 6 months ago when Greece applied for a bailout, its overall economic condition was not significantly worse than other small peripherals (eg: Ireland, Spain and Portugal). However, the broad market conditions deteriorated sharply over in a few weeks' time and no one seemed to be willing to extend credits. As indicated in yield curves, the market had priced in very high chance of a Greek default at that time.
 
The request has been welcomed by European financial ministers and the IMF. As we mentioned last week, the program would be financed from the European financial stabilization mechanism (EFSM) and the European financial stability facility (EFSF). It would also possibly be supplemented by bilateral loans to be negotiated by EU Member States with the UK and Sweden standing ready to consider a bilateral loan. The IMF, as stated in a press release yesterday, also ‘stands ready to join this effort, including through a multi-year loan’.
 
While the details on the package will be announced by the end of November, the program will address the fiscal challenges of the Irish economy in a ‘decisive manner’. It will build on Irish government’s 4-year budget plan and include a fund for potential future capital needs of the banking sector. The 4-year budget strategy aims to cut fiscal deficits by 15B euro by 2014 with a 6B euro reduction in 2011. The EU is confident that ‘decisive implementation of the program should allow a return to a robust and sustainable growth, safeguarding the economic and social cohesion’. We expect around 80-100B euro for 3 years. Ireland requires around 65B euro for funding needs are 65B euro in 2011-2013 while liquidity provisions for banks will take another 30B euro. The interest rate on the loans will be very similar to that being charged to Greece (around 5%)
 
The key conditionality of the program would be the banking sector restructuring as the Irish government would not accept to raise its competitive corporate tax rate. The EU believes a comprehensive range of measures – including deleveraging and restructuring of the banking sector – will contribute to ensuring that the banking system performs its role in the functioning of the economy.
 
In our opinion, the EU/ECB/IMF committee would require a new regulatory banking system in Ireland. Meanwhile, the Irish government may also need to extend a guarantee of all deposits and most bank securities until the financial system stabilizes. The government may need to inject more capitals to undercapitalized banks so as to regain market confidence.


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