As Ireland’s borrowing costs have been pushed to record highs, it is in talks with EU officials to claim bailout from European Financial Stability Fund (EFSF). The EFSF was agreed upon by the EU and the IMF in June as a safety net to help prevent indebted Eurozone countries from slipping into debt crisis, in response to Greece crisis.
Under the EFSF the 16 states of the Eurozone will provide 440 billion euros, in emergency loans to rescue crisis hit countries. The EFSF also constitutes 60 billion Euros from all 27 EU countries and 250 billion euros from the IMF, totaling to about 750 billion euros or one trillion dollars.
Greece was the first country to receive emergency loan from the combined package of the EU and the IMF in June 2010. Now Ireland is on the verge of knocking EMSF’s door. Reuters quoted two unnamed official sources from EU authorities that Ireland was in talks with EU officials to discuss aid mechanism. But, the aid may be announced only in the first week of December.
Ireland is said to be well funded until the first half of the next year, so the aid will not be associated with haircuts like in the case of Greece.
However, Ireland denies that it is in talks with the EU, confirmed by the EU commissioner Jean Claude Trichet. The IMF managing director said he was not approached for aid to Ireland and added Ireland can manage its finances. Ireland was once the highest growth country among the Eurozone countries during first ten years since the Eurozone formation. Now it has budget deficit equal to 32% of its GDP, the highest among EU countries. It is more than ten times to the limit imposed by the Eurozone monetary system, i.e. 3 percent of GDP.
After the Reuters report was published, Irish bond spreads over German bunds were reported to be come down slightly. Still Ireland borrowing costs remained at high levels at 5.8 percent that came down from 7% with the publication of the Reuters report.
The investors are worried that they would have to bear the part of increasing debt of Eurozone countries, with the announcement of the deal between Germany and France. German Chancellor Angel Merkel proposed that the bondholders would have to share the burden of future bailouts in the form of reduced yields, debt restructuring and allowing countries to default.
Even though the Merkel’s deal was said to be at proposal stage, markets panicked and demanded more yield from Irish bonds. Irish prime minister and finance minister criticized Angela for her unnecessary and untimely talk of future bailouts.
Greece also denied initially that it was claiming aid package from EU when it was neck deep in debt crisis. But, eventually it had to avail the bailout from the EU and IMF. Now also Ireland is in denial mode on EU bailout, which remains to be seen.