Q+A: How could Ireland tap EU emergency funds

BRUSSELS/DUBLIN (BestGrowthStock) – Ireland is in talks with the European Union on potential financial aid amid EU pressure for quick action to prevent tensions surrounding the Irish debt spilling over into other euro zone countries.

The Irish government said it would not need a bailout, but a senior member of the European Central Bank confirmed discussions were under way with Dublin and said that aid, if requested, would be available for Ireland’s banks or for the state itself.

WHAT IS AVAILABLE?

The European Union safety net consists of the European Financial Stability Mechanism (EFSM), which can lend up to 60 billion euros and the European Financial Stability Facility (EFSF), which is backed by 440 billion euros worth of euro zone government guarantees.

On top of that, the International Monetary Fund can lend additional money and the IMF has said it was ready to provide up to 50 percent of what Europe was providing.

WHO WOULD LEND FIRST?

If Ireland asks for and is granted a financing package, it would be from all three sources, an EU source said.

Money from the EFSM would be paid out first, but EFSF cash and the IMF would also be involved, because the EU wants to avoid a situation where one country uses up all the funds available under the EFSM.

The amount provided by the IMF would be negotiated on a case-by-case basis and does not have to be 50 percent of the European input, it can just as well be 30 percent, the EU source said.

The EFSM is available to all 27 EU members while the EFSF will lend only to the 16 countries of the euro zone.

HOW LONG WILL IT TAKE?

The mechanism has never been used before, but EU officials estimate it would take between 3 and 5 weeks from the application for assistance and the first disbursement of money.

Ireland was set to unveil its four-year fiscal plan later this month, possibly in the week beginning November 22, and that would presumably underpin any bailout.

Dublin was also planning to return to bond markets in January so having a bailout in place before the end of the year would remove that deadline for the country.

HOW WOULD IT START?

1. Ireland would have to send a request for help to the European Commission in which it would say how much money it needs and what steps it plans to take to restore financial stability. It would send the draft reform program to the Commission and to the Economic and Financial Committee (EFC) of junior finance ministers and central bankers.

2. The European Commission, in liaison with the European Central Bank, would assess the request and recommend to EU finance ministers to accept or reject it.

3. EU ministers would vote on the Commission proposal with a qualified majority.

4. If they say ‘yes’, the ministers would also say how much money Ireland would get, in what tranches, when, as well as set conditions for the help. The conditions are drawn up by the Commission in consultation with the European Central Bank.

5. Ireland and the Commission would sign a memorandum of understanding, which would contain the conditions for help.

6. The Commission would raise the money on the market by issuing bonds using the EU budget as collateral. The EU executive would pay out the tranches to Ireland.

7. If Ireland were to seek funds from the International Monetary Fund, apart from the EU help, it would first have to tell the Commission about it. The Commission would see what financing options are still available under EU schemes and inform the EFC as well.

8. The aid money would be paid out in installments after regular checks by the Commission that Ireland is on track with its reform program.

CONDITIONS

The EU/IMF would seek strict conditions on its loans and may require Dublin to consider tax hikes and spending cuts previously thought unpalatable.

Currently, Ireland is aiming for fiscal adjustments totaling 15 billion euros between now and 2014, a doubling of its previous target. Under a bailout scenario, the adjustments may be even harsher.

The EU could insist Dublin reneges on an agreement with public sector unions not to cut jobs or push through further wage cuts. Brussels may also demand Ireland raises its corporation tax rate, viewed as sacrosanct by Dublin, from its current low level of 12.5 percent.

Greece had to raise its rate of Value Added Tax (VAT) to 23 percent from 19 percent as part of its bailout package and Ireland may have to increase its VAT level from 21 percent currently.

WHAT WOULD BE THE COST FOR IRELAND?

The blueprint for EU support – although not binding – is the financial aid package to Greece where, for variable-rate loans, the basis is three-month Euribor, while fixed rate loans are based upon the rates corresponding to swap rates for the relevant maturities.

In addition there is a charge of 300 basis points for maturities up to three years and an extra 100 basis points per year for loans longer than three years. A onetime service fee of 50 basis points is charged to cover operational costs.

The cost of borrowing is roughly around five percent.

While there are no limits on the maturities of the loans to the country in need, the Greek case has set a precedent of 3-5 year loans.

HOW MUCH WOULD IRELAND NEED?

Any bailout needs to be big enough to bring to a close, once and for all, uncertainty over whether future Irish bank loan losses could rattle the sovereign and destabilize the euro zone.

Ireland has pegged its worst-case scenario for its banks’ bailout at 50 billion euros but investors don’t believe the government’s assessment after previous forecasts were raised.

A bailout for the banks wouldn’t necessarily have to equal or exceed 50 billion euros because Ireland has already pledged 33 billion euros for its banking sector but it would likely have to be well above 17 billion euros to reflect investor concerns about losses breaching the latest worst-case scenario.

Ireland’s banks are dependent on ECB support, a whopping 130 billion euros in funding at the end of October, and presumably this support would continue until markets had calmed down enough for lenders to start accessing wholesale funding markets again.

Ireland’s government is looking at raising around 63 billion euros over the next three years, according to a presentation by the country’s debt management agency last week. A bailout that encompasses both the sovereign and the banks may therefore come in around 80 billion euros.

A Reuters poll last week pegged the price of any bailout at around 48 billion euros, according to the median of forecasts from 10 respondents who gave a figure.

Euro zone sources have said the range could be between 45 and 90 billion euros depending on whether Dublin needs money for its banking sector, or not.

CAN IRELAND USE THE MONEY TO SUPPORT ITS BANKS?

Yes. While the EU funds cannot be accessed by Irish banks directly, the Irish government can borrow from the EFSM or EFSF and use the cash to support its banking sector.

WHY IRELAND IS NOT KEEN ON EU HELP?

An EU bailout would mean a big loss of face for a country once feted for its rags to riches transformation and proud of its struggle for independence from Britain.

But if Brussels insists on external assistance there is little Prime Minister Brian Cowen can do but accept. Ireland’s membership of the euro zone saved it from an Icelandic-style collapse and the ECB is keeping its banks afloat.

Ireland’s opposition parties will make much of the country’s loss of sovereignty in the event of a bailout but they are unlikely to obstruct it. There is no real alternative and they can blame the government for bringing it in.

Cowen’s parliamentary majority is likely to be cut to just two after a by-election later this month and most analysts expect an early general election in the first half of next year when two further by-elections are expected to wipe out his majority. A coalition of the center-right Fine Gael and center-left Labour party would likely form a new government following a general election.

Dangling an axe over the public sector and raising VAT and corporation tax would be hugely controversial. Trade unions would demonstrate against any pay cuts or job losses and there is the risk of strike action. There has not been any civil unrest in Ireland despite two years of austerity and the worst recession in the industrialized world but an extremely harsh set of measures could prompt violent protests.

Business elites would lobby intensively against any increase to the corporation tax or VAT. However, a marginal increase in the corporation tax rate is unlikely to trigger an exodus of multinationals. A VAT increase would encourage more Irish people to cross the border and do their shopping in Northern Ireland, where VAT is currently 17.5 percent. Britain’s VAT rate is set to increase to 20 percent next year.

(Reporting by Jan Strupczewski in Brussels and Carmel Crimmins in Dublin, editing by Ron Askew)

Q+A: How could Ireland tap EU emergency funds