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After weeks of denying need for bailout, Ireland capitulates

In a humiliating about-face, Ireland said Sunday that it would ask for an international bailout to stabilize its foundering banking sector and save the country from skyrocketing borrowing costs.

The exact size of the rescue package is still to be worked out, but analysts say that it could be worth as much as $100 billion in loans and guarantees from the European Union and the International Monetary Fund.

Ireland became the second country in the EU, after Greece, to seek outside help in stabilizing its finances. Dublin has been under intense pressure from its European neighbors to apply for a bailout, which they hope will calm investors and prevent a crisis of confidence in the euro currency.

Ireland is fiercely independent, and officials had insisted for weeks that they did not need assistance. Despite a monumental budget deficit amounting to 32% of the country’s economic output, the government said it had enough money to keep going well into next year.

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But analysts said capitulation was all but inevitable as investors pushed up the cost of borrowing — not just for Ireland, but also for other vulnerable EU nations such as Portugal and Spain.

The market interest rate on two-year Irish bonds rocketed from 3.95% on Nov. 1 to 6.69% by Nov. 11, making the cost of borrowing prohibitively expensive for a government already deep in debt.

Since then, rates have dropped back amid growing expectations of a bailout. But on Friday investors still were demanding a rate of 5.25% to buy Irish two-year bonds, 10 times the rate the U.S. government pays on its two-year debt and more than four times what Germany pays.

In a radio interview Sunday with Irish broadcaster RTE, Finance Minister Brian Lenihan said that, after intensive talks with EU and IMF officials over the last few days, he had concluded a bailout was in Ireland’s best interests.

“It is important that this state continues to fund itself in a stable way,” Lenihan said, “that economic continuity is preserved, that there is no danger to the borrowing which the state requires.”

Above all, he added, the emergency aid package would help ensure “that our banking sector is stabilized.”

The government formally made the request hours after Lenihan’s remarks, and European Union finance ministers quickly agreed. The European Central Bank said Sweden and Britain, which are not members of the 16-nation euro zone, also would be willing to make loans to Ireland.

Irish Prime Minister Brian Cowen said the bailout funds would help Dublin pay its bills and shore up its banks. “Put simply, Irish banks will become significantly smaller than they have been in the past so they can be gradually brought to stand on their own two feet once more,” he said.

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A number of major Irish financial institutions have collapsed in the last two years because of bad loans issued during Ireland’s real estate boom and bust. The government has taken on many of those debts, which have boosted its budget gap to the highest of any country in Europe. Despite the state’s intervention, Allied Irish, one of the hardest-hit banks, said skittish depositors had withdrawn nearly $18 billion this year.

To bring its runaway deficit under control, the government is expected to unveil a new austerity plan Tuesday, which would come on top of painful cuts already imposed over the last two years. But the economy has failed to rebound strongly, leading to fears that Ireland could be digging a deeper hole for itself through a vicious cycle of more cuts, low growth and increasing levels of public debt.

Details of Ireland’s rescue package will be hashed out in the coming days and, possibly, weeks. Lenihan said the deal would probably not exceed 100 billion euros, or about $137 billion.

Cowen said Ireland’s low corporate tax rate of 12.5% would not enter into the discussion. The country wants to preserve the rate to attract large companies.

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By acting Sunday, Dublin hoped to soothe investors before Monday’s opening of the markets.

The euro slumped from $1.42 on Nov. 4 to a seven-week low of $1.35 on Nov. 16, but began to rebound late last week as a bailout seemed inevitable.

So far, Ireland’s money woes haven’t shaken world markets the way Greece’s did last spring. The Greek financial collapse in late April triggered a plunge in share prices around the globe. But most stock markets have since recovered, and have shown little reaction in recent weeks to Ireland’s turmoil.

Still, a key test will be whether global investors see aid for Ireland as enough to boost confidence across the euro zone, or whether the plan stokes expectations that other struggling European economies will need bailouts as well. Some analysts say Portugal could be forced to appeal for help soon.

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The biggest fears surround major economies such as Italy and Spain. Italy is the fourth-largest economy in the 27-country EU and Spain is No. 5. Both dwarf Ireland, which ranks 13th.

henry.chu@latimes.com

Times staff writer Tom Petruno in Los Angeles contributed to this report.


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