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Saturday 3 December 2016

Last-ditch bid to fund banks and avoid bailout

Plan risks EU wrath over raising cash

Siobhan Creaton, Emmet Oliver and Fionnan Sheahan

Published 18/11/2010 | 05:00

THE Government has drawn up a last-ditch plan to avoid being forced to accept a bank bailout.

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It wants to borrow money for the banks -- supported by a guarantee from the European Central Bank.

That would mean technically avoiding a bailout and the politically damaging perception of a loss of sovereignty.

However, it would also risk alienating EU leaders who are convinced that the Government should take the bailout and get on with restoring the public finances.

And regardless of what sort of 'bailout' eventually emerges -- there will be strict budgetary conditions attached -- the Government will have to enforce a draconian Budget next month.

The revelation comes as a high-powered delegation from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) arrives in Dublin today to begin negotiations on a deal to restore confidence in the economy.

Mergers, nationalisation and the forced sale of banks will all be on the table when European officials debate a potential EU bailout. And shareholders in Irish banks could have their values wiped out.

Finance Minister Brian Lenihan is also coming under fresh pressure to raise Ireland's corporation tax rate, which is vital to securing more than 100,000 jobs.

The Government's counter-proposal would involve Ireland borrowing billions on the markets to support the ailing banks itself, possibly with the help of its European partners.

If the Government could raise the money at a low rate of interest instead of accepting a bailout from the EU stability fund, Taoiseach Brian Cowen and his team could continue to run the country and not be forced to hand over control to the IMF.

The Irish Independent has learned that discussions around achieving this solution are continuing as the EU continues to exert pressure on Ireland to accept a bailout. The plan could only work if the EU provided some form of support or guarantee on Ireland's ability to repay its debts.

Facing accusations that the Government has misled the country, Mr Cowen continued to insist last night that Ireland was not in talks on a bailout.

"We haven't started any negotiations. I want to get away from this word game," he said.

But the stance of the Taoiseach and his ministers in claiming there were no talks going on has drawn criticism within Fianna Fail and the Green Party. A spokesman for Mr Lenihan said the Government would "wait and see where the discussions lead to".

The Government has been stressing that it has enough money to run the economy until the middle of next year, but it is under pressure to fund the banks.

Solution

The coalition's proposal is aimed at finding a solution to the banking problem but it would be reliant on support from other EU countries.

As the EU stability fund cannot lend money directly to the banks and can only provide financial assistance to countries it is a compromise that is politically attractive to the Government.

Ireland has already got an offer of loans from British chancellor George Osborne, who said he had held "several discussions" with Mr Lenihan about such a possibility. "It is in our interest to ensure the Irish economy is stable,'' Mr Osborne said.

"A number of different avenues are open."

Mr Osborne refused to say how much money might be involved, adding he had given his personal support to Mr Lenihan during a private lunch of ministers held in Brussels.

The team of experts dispatched from Brussels, Frankfurt and Washington will begin to assess how much money Ireland needs.

The delegation is expected to be here for a couple of weeks and its report will provide the basis for any deal on Ireland's debt problems.

The Irish Independent has learned from European sources that bank mergers, nationalisation and forced sales of certain divisions are all on the list to be negotiated by the Government and a team of ECB, IMF and EU Commission officials.

Belgian finance minister Didier Reynders, who is the president of the EU group of finance ministers, told the Irish Independent shareholders in Irish banks could end up wiped out.

He said shareholders had already taken "haircuts" in other European countries. He was responding to a direct question about the likelihood of nationalisation.

Shareholders would be wiped out if enough additional capital was put into the banks, completely diluting the existing shareholdings, he explained.

Extra capital for the banks was among the issues to be discussed by the officials flying into Dublin today, Mr Lenihan admitted.

European Commissioner Olli Rehn said the Irish banks would require "quite some restructuring''.

The banks' "real needs" will be assessed this week and in following days, the Economic and Monetary Affairs Commissioner said.

And Mr Reynders said Europe would look at whether Irish banks could be organised in a "different way", warning the bloc would require "a major restructuring" of the banking sector if European funds were channelled into the State's embattled lenders.

The EU and IMF have €750bn in reserve for ailing sovereigns, made up of €60bn backed by the bloc's budget, €440bn in eurozone guarantees and €250bn from the Washington-based fund.

Irish Independent

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