BRUSSELS — European Union nations agreed to give Ireland a €67.5 billion ($89.4 billion) bailout to help it survive its massive banking crisis, and sketched out new rules for future emergencies to restore faith in the euro currency.
The deal, approved Sunday at an emergency meeting in Brussels, means two of the eurozone's 16 nations have now had to be rescued and underscores Europe's struggle to contain its spreading debt crisis. With Greece and now Ireland shored up, the fear is that traders will target the bloc's other weak fiscal links, such as Portugal and Spain.
The euro was slightly higher at $1.3279 in morning European trading Monday, up from $1.3237 in late trading in New York on Friday.
In Dublin, Irish Prime Minister Brian Cowen said his country will take €10 billion ($13.2 billion) immediately to boost the capital reserves of its state-backed banks, whose bad loans were picked up by the Irish government but have become too much to handle. Another €25 billion ($33 billion) will remain in reserve, earmarked for the banks.
The rest of the loans will be used to cover Ireland's deficits for the coming four years. EU chiefs also gave Ireland an extra year, until 2015, to reduce its annual deficits to 3 percent of GDP, the eurozone limit. The Irish deficit now stands at a modern European record of 32 percent because of the runaway costs of its bank-bailout program.
However, in a surprise move, European and IMF experts decided that Ireland first must run down its own cash stockpile and deploy its previously off-limits pension reserves in the bailout. Until now Irish and EU law had made it illegal for Ireland to use its pension fund to cover current expenditures. This move means Ireland will contribute €17.5 billion ($23.1 billion) to its own salvation.
The three groups offering funds to Ireland — the 16-nation eurozone, the full 27-nation EU, and the global donors of the International Monetary Fund — each have committed €22.5 billion ($29.8 billion). Extra bilateral loans from Sweden, Denmark and Britain are included within the EU totals.
Ireland's finance ministry said the interest rates on the loans would be 6.05 percent from the eurozone fund, 5.7 percent from the EU fund and 5.7 percent from the IMF. That's higher than the 5.2 percent being paid by Greece for its May bailout.
Ajai Chopra, who oversaw the Dublin negotiations for the IMF, confirmed Ireland's government would have freedom to set its own spending and tax plans.
He said Ireland will have 10 years to pay off its IMF loans, and that the first repayment won't be required until 4 1/2 years after a drawdown. Greece, in contrast, has three years to repay its loans.
Chopra said Ireland's decision to use its pension reserve fund had helped win the confidence of those who offered help.
"It makes total sense to use them at this time. I think this is quite unique in this type of arrangements and it will be taken as a sign of underlying strength," he said.
Cowen told a press conference that Ireland had no choice but to take help, because international investors had decided that lending to Ireland was too risky and were demanding unreasonable returns. The yield on 10-year Irish bonds rose Friday to a euro-era high of 9.2 percent.
"If we didn't have this program, we would have to go back to the markets, which as you know are at prohibitive rates," Cowen said.
Still, analysts and opposition leaders in Ireland warned that the country of 4.5 million was taking on a bill it couldn't afford to repay at rates exceeding 5 percent.
Michael Noonan of the main opposition Fine Gael party said he believed that fellow EU members — particularly Germany, the eurozone's bankroller — didn't want to give money too cheaply to Ireland, for fear that Dublin would grow addicted to it.
Noonan said the loans were "pitched high to drive us back into the market," and would encourage Ireland to pursue maximum austerity measures in hopes of reassuring the bond markets.
Cowen told reporters there had been no support in talks to ask senior bondholders to lose part of their stake on loans to Ireland's debt-crippled banks.
"There was no agreement from the European Union for such a proposal, because of the impact it could have in the relation to the stability of the entire banking system," he said.
Ireland is committed to slashing €10 billion ($13.2 billion) from spending and raising €5 billion ($6.6 billion) in new taxes over the coming four years, with the harshest steps coming in the 2011 budget to be unveiled Dec. 7.
But Cowen has only a two-vote majority in parliament. Last week he offered to dissolve parliament and hold early elections next year — but only after the budget is fully passed. Opposition leaders won't say if they will support the budget.
To shore up longer-term confidence in the euro, EU finance ministers also agreed on a permanent mechanism starting in 2013 would allow a country to restructure its debts once it has been deemed insolvent.Comment on this story
Jean-Claude Juncker, the head of the Eurogroup, which represents the 16 euro nations, said private creditors would be forced to take losses only if ministers agreed unanimously that the country had run out of money.
He said if a country was just facing a liquidity crisis, it would get financial help similar to the bailout agreed for Ireland.
European Central Bank chief Jean-Claude Trichet said making senior bondholders — chiefly banks that loan to other banks — suffer losses when a nation's finances head toward bankruptcy would be consistent with existing IMF policies.
Pogatchnik contributed from Dublin. David Stringer in Dublin also contributed.