Vows of EU support but no bailout yet for Ireland

By Gabriele Steinhauser

Associated Press

Published: Tuesday, Nov. 16 2010 5:42 p.m. MST

BRUSSELS — An anxiously awaited meeting of European finance ministers ended Tuesday without an agreement to bail out Ireland's debt-stricken government, though both Irish and EU officials vowed to stabilize the banks at the center of the crisis and keep it from spreading to other fragile economies connected by the euro.

Ireland has taken over three banks and is expected to take over more in a bailout that has already reached €45 billion ($61 billion) and likely will push the nation's 2010 deficit to a staggering 32 percent of GDP. The government in Dublin insists that it doesn't need a bailout from Europe, but growing doubts about Ireland's ability to pay its bills have sent interest rates soaring on Irish bonds.

Representatives of the European Union, the European Central Bank and the International Monetary Fund will travel to Ireland this week to determine what to do about the banks, Irish Finance Minister Brian Lenihan said.

"Ireland is now engaging in an intensive, and disclosed, engagement in relation to the problems in the banking sector," said Lenihan. "We will take whatever decisive measures that are required to stabilize our banking system as part of the stability of the wider eurozone."

EU monetary affairs chief Olli Rehn said Irish authorities "are committed to working" with the EU, ECB and IMF to "to determine the best way to provide any necessary support to address market risks, especially as regards the troubled banking sector."

"This can be regarded an intensification of preparations of a potential program in case it is requested and deemed necessary," Rehn said.

It remained to be seen whether Tuesday's statements would help calm bond market turmoil when trading resumes Wednesday.

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 — have worsened Europe's government debt crisis. Markets have pushed up borrowing costs for other vulnerable nations and threatened to destabilize the common euro currency.

The priority for European leaders is containing contagion — a market panic that jumps from one weak country to the next.

Behind Ireland stands Portugal, one of the eurozone's smaller members 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.

Stock prices fell worldwide and gold and other commodities plunged in value as investors awaited word from the talks in Brussels. The euro fell 0.7 percent against the dollar to $1.35.

The interest rate on Irish debt rose again Tuesday as hopes faded that the country would seek a bailout like the one that saved Greece from defaulting on its bonds in May. A €750 billion ($1 trillion) backstop stands ready from other countries that use the euro.

Governments struggling with debt — built up during the recession and in some cases over years of living beyond their means — have slashed spending and raised taxes. But such austerity measures threaten to undermine desperately needed economic growth, in turn making it harder for nations to repay their debts.

The Irish government protests it doesn't need aid, at least not yet, because it has sufficient funds through mid-2011 and is planning €6 billion ($8 billion) in 2011 cuts and tax hikes. However, it has suggested that direct EU aid to its cash-strapped banks would boost Ireland's creditworthiness, since the government has guaranteed the banks' financial obligations.

Ireland is making "significant efforts" to deal with its budget deficit, said Jean-Claude Juncker, who heads the group of 16 nations that use the euro.

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