The European commissioner for economic and monetary affairs and head of the International Monetary Affairs said today Ireland’s bailout plan was “a forceful response” to the vulnerabilities in the banking system.
In a joint statement, EU commissioner Ollie Rehn and IMF managing director Dominique Strauss-Kahn said they “strongly supported” the economic programme announced by the country.
The €85 billion EU-IMF bailout package for Ireland announced last night will see the National Pension Reserve Fund used to help provide a further €10 billion in further capital for the banks.
The banks could end up getting a further €35 billion if their losses are bigger than expected. The remaining €50 billion is to cover the State’s borrowing needs for the next three years.
“Swift and sustained implementation of this program will create a smaller banking sector that is robust and well capitalised, and able to serve the needs of Ireland's economy,” the statement said. “It also offers a road map for sound public finances by setting strong, upfront actions in a multi-year framework.”
They said the plan showed the Government’s determination to reorganise the banking sector, strengthen regulation and prevent a repeat of mistakes made in the past. Implementing the plan will offer a “sound basis for stable, job-creating growth," the statement said.
Interest on the bailout fund is expected to be an average of 5.8 per cent, and is designed to eliminate the need for the country to go to the markets for funding for some time.
German finance minister Wolfgang Schaeuble said today he hopes the aid package will calm euro zone financial markets and said there is no need to increase the size of the euro zone's rescue funds.
Mr Schaeuble also said Portugal was on track to implement a tough plan of fiscal austerity that should allow it to avoid a bailout. "We are hopeful that a little more calm and a reality will come back to the markets' valuations," told German radio station Deutschlandfunk.
Asked if consideration had been given to topping up a €750 billion safety net for the euro zone, Mr Schaeuble said: "No, there is no reason for that."
He also said Germany had the unanimous support of EU members in its push for creditors to participate in the cost of future bailouts after 2013.
Yesterday the EU, anxious to prevent market contagion engulfing Portugal and Spain, approved Ireland's rescue plan and outlined a permanent system to resolve a debt crisis, in which investors could gradually share the cost of any future default.
"Portugal is currently under pressure and therefore it is necessary that Portugal implements the measures it has announced," Mr Schaeuble said. "We have talked to Portugal intensively on all levels and that will be continued. There is close contact. Portugal has taken a lot of measures and is on a good path."
European officials have been at pains to play down the links between Ireland and Portugal, widely seen as the next euro zone "domino" at risk. Troubles in Portugal could spread quickly to its larger neighbour Spain because of their close economic ties.
Portugal and Spain's borrowing costs also rose to near record highs last week but still remain much lower than those which have forced Ireland to seek a rescue.
As part of the permanent crisis-resolution mechanism, which the 27 EU finance ministers approved in a broad outline, private bondholders could be made to share the burden of restructuring of a euro zone country's sovereign debt bought after 2013.
That was based on a joint proposal by France and Germany and would be subject to a case-by-case evaluation without any automaticity. Some of its EU partners, however, have criticised Germany for bringing the issue up at this point.
"We have said there must be a participation of creditors because over the long-term ... we can't have taxpayers alone carrying the risk," Mr Schaeuble said.
"It was important that we reached a unanimous deal - many didn't think that was possible and yesterday we did it."
Additional reporting: Bloomberg
