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Irish crisis, contagion fears loom over EU meeting

By Shawn Pogatchnik

Associated Press

Published: Tuesday, Nov. 16 2010 11:26 a.m. MST

BRUSSELS — European officials scrambled Tuesday to stop Ireland's debt crisis from turning into another Greek-style meltdown and dragging down the euro currency, holding talks over solutions including possible help for Ireland's troubled banking system.

Irish Prime Minister Brian Cowen said that the Irish government itself is not seeking and doesn't need a European Union bailout like the one that pulled Greece back from bankruptcy in May, reiterating that his government is fully funded through mid-2011.

But support for Ireland's banks would take financial pressure off the government.

Only months after saving Greece, the 16-country eurozone has been shaken anew by concerns that Ireland will be unable to pay the cost of rescuing its banks, which ran into trouble when the country's real estate boom collapsed and risky loans stopped being repaid.

The bigger fear is that financial panic would hop from Ireland to other vulnerable nations like Portugal and Spain and threaten the stability of the euro.

The European Union's top monetary official, Olli Rehn, said the focus was on the banks as the EU works with the European Central Bank, the International Monetary Fund and national governments to find a solution.

"The (European) Commission, together with the ECB, IMF, and the Irish authorities are working in order to resolve serious problems of the Irish banking sector and I expect that the eurogroup will support this objective," said Monetary Affairs Commissioner Olli Rehn.

"This is not a matter of the survival of the euro, this is a very serious problem in the banking sector of Ireland."

Jean-Claude Juncker, who heads the group of 16 nations use the euro, said that the €750 billion financial backstop eurozone governments set up together with the IMF last spring could be used to support the Irish banks.

In his speech to the Irish parliament in Dublin Cowen said Irish officials have been talking "with our European counterparts to see in what way market risks can be taken out of the equation," but declined to elaborate.

European nations are worried that the tension over Ireland's stability is making borrowing more expensive for countries like Portugal and Spain, threatening to push them to the brink of default, as happened with Greece. Containing contagion — a market panic that jumps from one weak country to the next — is the priority.

Behind Ireland stands Portugal, one of the eurozone's smaller member with 1.8 percent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big — 11.7 percent of eurozone output — that it could present a much larger challenge if it needs help.

More tensions flared up again over Greece — which was bailed out by eurozone governments and the IMF this spring.

Austrian Finance Minister Josef Proell said that Austria hasn't yet released its contribution to the next tranche of the €110 billion emergency loan because the country hadn't fulfilled the requirements of the bailout agreement.

"If they miss the targets we need to have a discussion," Proell said. "I'm prepared to pay out the tranche once the figures fit."

The EU statistics agency on Monday said Greece's 2009 budget deficit was much higher than previously expected. To receive the next portion of the loan, Athens has to cut its deficit by a certain amount every year.

Greek Finance Minister George Papaconstantinou defended his country's performance. "Greece during 2010 performed the largest consolidation effort ever seen in the eurozone," he said. "We will fully respect our 2011 targets and intend to take all necessary measures."

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