Ireland set for rescue, contagion fears remain

Ireland is poised to become the second eurozone country after Greece to seal a bail out but few expect the rescue to end a deep crisis that has haunted Europe’s currency bloc for much of the past year.

Tens of thousands of Irish are expected to march in Dublin on Saturday in a union-organised protest against the government’s decision to seek aid from the European Union and International Monetary Fund to help it deal with its crumbling banks and gaping budget deficit.

European officials hope the €85-billion ($112,7-billion) aid programme will help draw a line under the debt crisis which started in Greece and now threatens to engulf countries like Portugal and Spain, the fourth-largest economy in the euro zone.

But market pressures have shown no signs of easing. The euro stumbled to a two-month low against the dollar on Friday and the risk premiums investors demand to buy Irish, Portuguese and Spanish debt instead of German Bunds hovered near record highs.

“The current market environment is so febrile and illiquid that the differences between Portugal and Ireland [or Greece] are quickly overlooked, as markets focus on the possible next stage of contagion,” Barclays Capital economist Laurent Fransolet wrote in a research note.

The conditions of Ireland’s rescue deal with the European Union and International Monetary Fund are expected to be unveiled on Sunday.

A report late on Friday from state broadcaster RTE said the interest rate on the bail out funds being negotiated with the EU and IMF would be between 6% and 7%, at the high end of expectations.

The main opposition party Fine Gael said such a rate would be unacceptably high, potentially creating a new hurdle for the government as it works to complete the rescue and secure passage of its 2011 austerity budget next month with a razor-thin parliamentary majority.

Even before Ireland had begun talks on a rescue, its fragile government led by Prime Minister Brian Cowen had announced plans for a far-reaching four-year austerity programme targeting savings of €15-billion.

That means significant new cuts mandated by the EU and IMF are unlikely. For now, Ireland appears to have successfully resisted pressure from some eurozone partners for it to raise its ultra-low 12,5% corporate tax.

The rescue deal could force senior bondholders in the country’s big banks, which face mounting losses due to reckless property lending in the boom years, to shoulder some of the costs of the bailout.

Anger bubbling
The Irish public has stoically borne two years of recession, a relentless surge in unemployment and a programme of tax rises and spending cuts, but anger is bubbling over at the new measures and the decision to seek aid — a move many believe hands over the country’s hard-won sovereignty to Brussels.

Unions have called for a march on Saturday to Dublin’s General Post Office building, headquarters of a nationalist uprising against British rule in 1916 and a potent symbol of Irish independence.

The biggest demonstration of the crisis so far was in early 2009 and attracted about 100 000 people.

Organisers are predicting tens of thousands on Saturday. Union leaders say they do not expect the protest to turn violent.

Once the Ireland rescue is sealed, investors could turn their attention to Portugal, which passed an austerity budget for 2011 on Friday but is struggling to meet its deficit reduction targets.

Portuguese Prime Minister Jose Socrates said late on Friday that he expected passage of the budget to boost market confidence, but a Reuters poll this week showed a majority of economists believe the country will be next in the firing line.

“All in all, despite denials by Portuguese and European policymakers of a possible rescue package, we think Portugal will likely be forced into the hands of the European Financial Stability Facility — and of the IMF/EU/ECB Troika — very soon, probably before year-end,” Citigroup economists wrote on Friday. – Reuters

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