LONDON – In a humiliating about-face, Ireland said Sunday it would ask for an international bailout to stabilize its foundering banking sector and save the country from soaring 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 had no need of assistance. Despite a budget deficit amounting to 32 percent of the country’s economic output, the government said it had enough money to keep going well into next year.
But analysts said capitulation was all but inevitable as investors continued to dump the euro and push 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 percent on Nov. 1 to 6.69 percent by Nov. 11, making the cost of borrowing prohibitively expensive for a government already deep in debt.
Since then, rates dropped back amid growing expectations of a bailout. But on Friday investors still were demanding a rate of 5.25 percent 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.
Finance Minister Brian Lenihan said Sunday that, after intensive talks with EU and IMF officials over the past 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.”
The government formally approved the request later in the day, and European Union finance ministers quickly agreed. The European Central Bank said that Sweden and Britain, which are not members of the 16-nation euro zone, said they, too, would be willing to make loans to Ireland.
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 has 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, revealed that skittish depositors had withdrawn nearly $18 billion so far 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.