(Sharecast) Ireland could receive a bail-out loan of as much as €85bn, brokers suggested today, as a team from the IMF, European Central Bank and European Commission arrived in Dublin.
The EU mission will see for themselves the health of the country’s finances and its cash-strapped banks.
Ireland’s central bank governor Patrick Honohan indicated this morning that their conclusion is likely to be that Ireland needs a loan of “substantial proportions”.
“I’m not the government but I know these are serious talks. They would not send a large team if they did not think they could agree to a package,” he said.
“It will be a large loan because the purpose of the amount to be advanced, is to show that Ireland has sufficient firepower to deal with any concerns of the market,” he told Irish broadcaster RTE.
“That’s the purpose of it, so we’re talking about a very substantial loan for sure. Tens of billions, yes.”
The Irish government has so far resisted calls for it to utilise the EU and IMF bail-out mechanism, but suggestions the European Central Bank is reluctant to continue to allow Irish banks to use it as an open-ended source of liquidity may mean there is little choice but for Ireland to agree a deal.
Ireland was one of the first countries to prop up its banking system when the credit crisis struck, not only guaranteeing depositor’s money but other creditors as well.
As the scale of the problems in the Irish property sector have grown, that commitment has become cripplingly expensive.
Ireland’s budget deficit is tipped to hit over 30 percent of GDP this year, while its banks have taken €130bn in funding from the ECB.
“The huge sums of money put in by the government to support the banks have not generated sufficient confidence yet. The money is enough objectively, but the confidence isn’t there, and it’s partly not there because investors are concerned in general about the government finances and the future prospects for growth and employment,” Honohan said.
Interest on any loans would likely be “in the territory” of five percent, the current standard rate on IMF funds, he suggested.
Irish PM Brian Cowen has proposed €15bn of public sector cuts over four years, but brokers suggest the banks alone need €50bn to survive with most of that heading towards the nationalised Anglo Irish Bank.
The Dublin talks are expected to last for some days and follow two days of discussions in Brussels involving eurozone and EU finance ministers.
UK chancellor George Osborne has said he would support a deal for Ireland, but has not been drawn on the size of financial commitment the UK could face.
EU ministers are concerned that without a deal, other indebted states such as Portugal, Italy and Spain could be dragged into similar problems.
But Irish politicians are worried the bail-out may have onerous strings attached. France has already said Ireland may have to raise its ultra-low 12.5 percent corporation tax rate in return for the assistance package.
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