By Bruno Waterfield in Brussels and Robert Winnett
Ireland’s justice minister has refused to rule out the possibility of an EU bail-out for the beleaguered economy as Brussels considers the possibility of a £77 billion rescue package.
“Things are happening day by day,” Dermot Ahern, told RTE television when asked whether he would promise that Dublin would not apply for financial assistance.
EU sources confirmed yesterday that talks between the two sides about a rescue package had continued through the weekend.
However Mr Ahern denied the existence of any discussions.
“There are no negotiations going on. If there were, the government would be aware of it, and we are not aware of it,” he said. adding that he had spoken to Prime Minister Brian Cowen on Sunday and to Finance Minister Brian Lenihan.
Investors have rushed to sell Irish debts in recent weeks and there is growing speculation that if Europe fails to intervene there may be a run on other countries, including Spain and Portugal.
The EU rescue package, seen as “very likely” by European officials, could cost the British taxpayers as much as £7billion following a deal agreed by Alistair Darling when he was still chancellor in the political limbo following the general election in May. Under its terms, Britain agreed to underwrite EU plans to rescue countries in difficulty.
David Cameron has publicly expressed support for steps to assist Ireland. Several British banks, particularly RBS, have exposure to Irish government debt amounting to billions of pounds and have watched their shares fall over the past week.
Germany has been pressing Ireland to accept an EU-led financial rescue in order to calm international investors and to protect the euro-zone from a new debt crisis.
Ireland has been driven to the brink of an international rescue deal because its economy, which grew sharply on the back of a booming property market and a burgeoning financial services sector, has suffered the deepest recession of any developed economy.
The so-called Celtic tiger is facing problems repaying record government debts as it struggles with high unemployment and the costs of some of the world’s biggest bank bail-outs.
However, the government is extremely wary about applying for emergency help from Europe amid fears that international regulators will intervene in its affairs. It may be forced to increase tax as a condition of any deal.
Irish ministers denied they would need international assistance, although the Greek government made similar claims shortly before its bail-out earlier this year.
Sources confirmed that Irish and other eurozone governments were holding “frantic” talks with officials from the European Central Bank and the EU throughout the weekend. “Things are moving quickly,” said an Irish official as EU officials worked late into the night.
The key period, said officials, would be the reaction of the international market today to Irish and other eurozone bonds, especially Portuguese and Spanish government debt. Any sign of panic will lead to fears of so-called market contagion spreading from Ireland to Portugal, Spain and the wider eurozone. This is likely to lead to Ireland coming under pressure to sign up to the bail-out.
“As long as European governments go back and forth, the markets won’t settle down,” said Marco Annunziata, the chief economist at UniCredit Group in London. “We’re likely to see markets getting more nervous and worried about what is going on in Europe.”
Ireland has experienced the worst recession of any major economy and has amassed government debts of more than €100 billion (£85billion). It has an unemployment rate almost twice as high as Britain at 13.2 per cent and currently has a record deficit equivalent to 32 per cent of its gross domestic product.
A full bail-out deal, rumoured to be to worth between £51billion and 77billion could be agreed at a meeting of EU finance ministers.
Most of the help will come from the £374billion European Financial Stability Fund, which is funded by eurozone countries. However, the support of all countries will be needed because part of the aid package will come from a £50billion EU emergency fund underwritten by Britain to the value of £7billion.
A rescue deal would be deeply unpopular with Irish voters, who value national independence and the low-tax regime that pulled in foreign investment from America and other non-European companies, fuelling high Irish growth rates over the past 20 years.
An EU bail-out, with tough fiscal conditions attached, would be humiliating for a country once feted for its rags-to-riches transformation.