ECB says Ireland may use aid for banks
Ireland could use European Union aid to bail out cash-strapped banks, the European Central Bank said, stepping up pressure on the Government to prevent an escalation of the debt crisis that threatens the euro economy.
As Ireland insisted it doesn’t need handouts for its public budget, ECB Vice President Vitor Constancio said it could use the EU’s emergency fund to recapitalise banks reeling from the bursting of the real-estate bubble.
“The problems of the Irish banking sector are not only problems of liquidity but also in some cases problems of capital,” Constancio said in Vienna today.
While the EU rescue fund can’t lend directly to banks, the Government could tap it “and use the money for that purpose,” he said.
Irish bonds rallied as investors bet a bailout is imminent from the EU’s €750bn fund set up in May to stabilise the euro region’s 16-nation economy.
Germany is leading a drive to remedy Ireland’s debt woes before other countries succumb to the speculation that claimed Greece as the first victim.
The premium that investors demand to hold Irish 10-year bonds over benchmark German bunds fell to 547 basis points today compared with a record 652 basis points on November 11.
EU-Irish negotiations under way since the weekend will intensify at a meeting of euro-area finance ministers in Brussels tomorrow.
Germany is pressing for a quick resolution to a crisis it helped cause by demanding that bondholders share the costs of future EU bailouts.
Thirteen straight daily drops in Irish bond prices forced German Chancellor Angela Merkel to backpedal.
She signed up to a five-country declaration on November 12 that exempts bonds now on the market from any restructuring that could be imposed under a permanent rescue mechanism to be created by 2013.
As divisions festered in the EU and on the ECB’s policy- setting council over how to deal with Ireland, it was revealed today that Greece, the country that triggered the debt crisis, had a bigger budget deficit than initially thought.
Eurostat, the EU’s statistics agency, put out revised figures showing Greece’s 2009 deficit was 15.4pc of gross domestic product, higher than an earlier estimate of 13.6pc.
To meet a savings target for 2011, Greece may need “new policies which were not asked for or contemplated before,” Constancio said.
He spoke after Prime Minister George Papandreou’s party escaped losses in regional elections that might have triggered early national balloting.
As ministers head to Brussels, the immediate focus is Ireland, with banks increasingly reliant on the ECB for funding.
While the Government doesn’t need to raise money until mid- 2011, Finance Minister Brian Lenihan may use tomorrow’s Brussels meeting to seek aid for the banks.