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The Irish problem

2010-11-17 12:55:53

Nov 16th 2010, 8:46 by The Economist | BRUSSELS

THE outline of a rescue package for Ireland is emerging from the vortex of the

latest euro-zone crisis. As finance ministers of the euro zone prepare to meet

in Brussels tonight, the Irish government is starting to make a fine

distinction between what needs and does not need to be salvaged: the state of

Ireland does not need a bail-out, it says, but the banking sector needs help

for restructuring.

The European Central Bank, which has been helping to buy up Irish bonds to try

to prop up the country s finances, wants Ireland to tap into tens of billions

worth of European funds to stabilise its banking sector and avoid the risk of

contagion to other weak euro-zone countries. Portugal is wobbling and Greece is

expressing exasperation with Germany. Like many, the Greek prime minister,

George Papandreou, blamed Germany for setting off the latest round of panic in

the markets by pressing the EU to seek a system of restructuring the debts of

countries that struggle to pay them. "This could force economies towards

bankruptcy," complained Mr Papandreou.

The Irish prime minister, Brian Cowen (pictured), insists that his country does

not need a bail-out, as it has enough reserves to stagger on until next summer.

This is a strange reversal of the situation at the time of the Greek crisis.

Then it was the donors who hesitated about giving help. Now it is the

recipients who are vacillating about accepting it.

One option being considered is to label the bail-out money a move to help

restructure the banking sector. There is some logic to this, as the sector s

collapse is the heart of the problem. The hope is that it can be made sturdy

enough for some of Ireland s banks to be bought up by foreign ones. That would,

in turn, help ease the Irish banking sector s liquidity crisis.

Given the state s blanket guarantees to the whole banking sector, it is hard to

distinguish where the banking crisis ends and the sovereign fiscal one begins.

Still, this finesse would save the Irish government s amour propre, and allow

it to claim that it has not (yet) abandoned Ireland s hard-won sovereignty. I

understand, though, that a precautionary fund could still be set up to help

Ireland s state finances as a back up.

Another sensitivity to be addressed is Germany and its troubles with the

constitutional court in Karlsruhe. I am told that this could be done by another

manoeuvre: using only some of the several pots of money that went to create the

750 billion safety net for the euro zone. Most of this, 440 billion, is made

up of guarantees from 16 individual euro-zone countries in the European

Stability Financial Facility (EFSF). Some 60 billion comes from the European

Commission, and 250 billion will be provided by the IMF.

One option being considered is to use initially only the commission s money,

perhaps backed by some IMF money too. The political attraction is that the

commission s money can be released more quickly, as it requires only a vote by

qualified majority of the 27 members of the EU, instead of the unanimous vote

of 16 euro-zone members needed to release money from the EFSF. And being part

of the European budget, it helps reduce the perception that Germany is

dipping into its own pockets to save foreigners yet again. The assumption is

that the Karlsruhe court would be less critical of community funds being used

in such a manner.

The problem, though, is that assuaging Germany s sensitivities may yet grate on

Irish ones. Taking the commission s money may mean the German contribution

becomes less visible. But it may highlight the involvement of a country that is

in the EU but outside the euro zone: Britain, the old coloniser.

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Posted: 2010877@473.09

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stranger

EU begins Irish Republic bail-out talks

Olli Rehn described the financial situation in the Irish Republic as "our most

pressing challenge of today"

European finance ministers are meeting in Brussels, with the issue of a

possible bail-out of the Irish Republic still top of the agenda.

EU finance commissioner Ollie Rehn said on Tuesday plans were being made for a

potential rescue programme, should the Irish government ask for help.

As he arrived for the meeting, Mr Rehn said the EU was engaged in "effective"

consultation with the Irish government.

British Chancellor George Osborne said the UK was "ready to support Ireland".

"We're going to do what is in Britain's national interest," he said, ahead of

the meeting of the Economic and Financial Affairs Council (Ecofin).

"Ireland is our closest neighbour and it's in Britain's national interest that

the Irish economy is successful and we have a stable banking system."

There have been reports that the UK is considering offering billions of pounds

of direct loans to the Irish Republic.

When asked about this, Mr Rehn said: "That is under discussion and it is

natural because the United Kingdom and UK banks have a very significant

exposure in Ireland.

"There is a very strong interconnection in the banking sector and the financial

system between the two countries."

'Accent on banking'

Tuesday's meeting of eurozone ministers and financial institutions in Brussels

came against a background of renewed financial market turmoil.

At the centre of this has been the markets' fear that the governments of the

weaker eurozone countries - particularly the Irish Republic - cannot afford to

repay their huge debts.

Mr Rehn said that "the Irish authorities are committed to working" with the EU,

the European Central Bank and the International Monetary Fund to calm market

turmoil.

Start Quote

If Ireland is fundamentally incapable of paying off all it owes... some will

say it is grotesquely unfair that the cost should fall entirely on taxpayers in

Ireland, the EU and (if IMF money is drawn) the rest of the world

End Quote

He told reporters that potential rescue plans would have an "accent on

restructuring its banking sector".

A statement issued after the meeting praised the Republic of Ireland's efforts

to combat its problems: "The Eurogroup welcomes the significant efforts of

Ireland to deal with the challenges it faces in the budgetary, competitiveness

and financial sector areas."

The statement said the Irish government would engage in a "short and focused

consultation" with the Commission, the ECB and the IMF in order to determine

the best way to provide any necessary support.

It concluded by adding "We confirm that we will take determined and

co-ordinated action to safeguard the financial stability of the euro area, if

needed, and that we have the means available to do so".

The IMF welcomed the Republic of Ireland's decision to allow a "short and

focused consultation" to decide if the country needs a budget bailout.

Mr Rehn called the Irish Republic the most pressing challenge of today, adding

that there was "an intensification of preparations of a potential programme in

case it is requested" but the meeting proposed no concrete course of action.

'No support'

The Irish government has repeatedly denied that it is seeking outside support.

Start Quote

They convey an image of Ireland totally at odds with the reality of a country

that last week was voted by the UN human development index as the world's 5th

most desirable place to live

On Tuesday, Prime Minister Brian Cowen told parliament that he had not asked

for bail-out money and that the Irish economy was well funded until next year.

He said his country was working with European partners to deal with the debt

issue, but that his country was neither "immune or unique" amid the recent

economic crisis.

Irish finance minister Brian Lenihan said European authorities had welcomed the

steps taken to date by the Irish government.

"What they are saying and what we are saying, what all the finance ministers

are saying, is that we have to work together to resolve these market

difficulties," he said.

Earlier, Mr Rehn warned that Europe must "resist alarmism" amid the latest

fears over Irish debts.

Mr Rehn, speaking after the talks had finished, said the EU would, however,

step up work on support for the Republic "with an accent" on its banks.

Meanwhile, concerns were raised about the eurozone's bail-out of Greece after

Austria said Greece had not fulfilled its obligations under the EU-backed aid

package. Austria has yet to submit its December contribution to the package.

This followed the release of figures on Monday showing that Greece's budget

deficit was worse than previously thought.

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Posted: 2010877@475.01

stranger

What went wrong in the Irish Republic

The 1990s were good for the Irish Republic's economy, with low unemployment,

high economic growth and strong exports creating the Celtic Tiger economy. Lots

of multi-national companies set up in the Republic to take advantage of low tax

rates.

At the beginning of 1999, Ireland adopted the euro as its currency, which meant

its interest rates were set by the European Central Bank and suddenly borrowing

money became much cheaper.

Cheap and easy lending and rising immigration fuelled a construction and house

price boom. The government began to rely more on property-related taxes while

the banks borrowed from abroad to fund the housing boom.

All this left Ireland ill-equipped to deal with the credit crunch. The

construction sector was hit hard, house prices collapsed, the banks had a

desperate funding crisis and the government was receiving much too little tax

revenue.

The economy has shrunk and the government has bailed out the banks. A series of

cost-cutting budgets have cut spending, benefits and public sector wages and

raised taxes. But there are still doubts about future government funding.

The main concern for the Republic's economy is its banks, most of which are now

controlled by the government. They have had to borrow at least 83bn euros (

71bn) from the European Central Bank because other banks will not lend to them.

Q&A: Republic of Ireland finances

By Simon Atkinson Business reporter, BBC News

The finances of the Irish Republic are top of the agenda as European finance

ministers gather on Brussels, with pressure on the country to access EU

bail-out funds.

How did Republic of Ireland get into this mess?

Hailed as the "Celtic Tiger" for the rapid growth of its economy, in the space

of three years the country has gone from boom to almost bust.

Much of its growth was built around the property market, but since 2008 this

has suffered a dramatic collapse.

House values have fallen by between 50% and 60%, and bad debts - mainly in the

form of loans to developers - have built up in the country's main banks. This

almost wrecked the institutions, leaving them needing bailing out by the

government at a cost of 45bn euros ( 39bn; $60.1bn).

This has opened a huge hole in the Irish government's finances - which will see

the government run a budget deficit equivalent to 32% of GDP this year.

Another challenge facing the country is the very sharp deterioration in tax

revenues. The gap between what it spends on public services and what it

receives in tax revenues is a substantial (and unsustainable) 12% of GDP.

As the economy has slowed, unemployment has risen, and there are fears that the

country is about to experience a double-dip recession.

Why is this a worry to other countries?

Other countries, especially financially weaker members of the eurozone such as

Spain and Portugal, are particularly concerned about the Republic's economic

position.

The common element they share is severely stretched government finances, which

make lenders in the financial markets worry about whether they will be repaid,

and therefore wary of making new loans.

The worry is that if the Republic of Ireland is in trouble, then other weak

eurozone countries might be too.

The key impact of this is that this bumps up the cost of borrowing on

international markets (by increasing the yield on government bonds).

In some ways, this is not a huge problem for Dublin at the moment. It says it

is "fully funded" until at least the middle of next year and so it does not

need to raise money for now.

However, other countries are relying on markets to borrow money. They want the

Republic to take support to try and take some of the heat off them.

People walk past a recruitment office in Ireland Like many EU nations the

Republic of Ireland is seeing high unemployment and lower tax revenues

The Irish Republic keeps saying it will not be asking for a bail-out because it

does not need help. Is that true?

It is true that the government believes the country is fully funded until at

least the middle of next year, meaning it can cover its outgoings without going

to the markets to borrow more money.

But the immediate concern is its banks. Several have been part-nationalised,

meaning most of the banks' massive debt is now actually government debt.

Those banks have found it near-impossible to borrow on the money markets and so

are being kept in business by support from the European Central Bank. According

to Barclays Capital, more than 10% of all the loans and investments made by the

Republic's banks - their assets - are financed with ECB cash.

There are suggestions that the ECB wants to persuade the Republic to take

bail-out funds - which it can then invest in the banks to provide them with

more protection against future losses.

BBC business editor Robert Peston says that the ECB would be keen on this - not

least because it is not the role of a central bank to support unsustainable

institutions indefinitely - and a bail-out would allow the bank to phase out

its supply of credit.

Why does the Republic not just take the money?

The Republic is proud of its independence, and on the streets of Dublin the BBC

found many Irish people reluctant to take an EU handout.

Such a move would mean a big loss of face for the country - essentially meaning

that its survival and solvency was reliant on Brussels.

Irish Enterprise Minister, Batt O'Keeffe, summed up this sentiment saying: "It

has been a very hard-won sovereignty for this country and the government is not

going to give over that sovereignty to anyone."

So how much would the country need and where would it come from?

To be successful, a bail-out would have to be sufficiently large to end all

uncertainty about whether future losses at Irish banks could destabilise the

eurozone.

Estimates suggest that, to do this, it may need to borrow up to 80bn euros.

There are several sources where this money would come from. They include the

European Financial Stability Mechanism (EFSM), which can lend up to 60bn euros,

and the European Financial Stability Facility (EFSF), which is backed by 440bn

euros worth of eurozone government guarantees.

The International Monetary Fund can lend additional money and the IMF has said

it was ready to provide up to 50% of what Europe was providing.

It is likely that money from the EFSM would be paid out first, but it is also

likely that the other sources would be drawn on to avoid a situation where one

country uses up all the funds available under the EFSM.

Dublin The UK and the Republic of Ireland are key trading partners

What are the potential impacts for the UK?

While the UK is not part of the eurozone, its taxpayers could end up footing

some of the bill for any bail-outs.

For example, the UK contributes 12% (more than 6bn euros) to the EFSM.

Also, if the International Monetary Fund (IMF) was asked to step in, the UK

would fund 4.5% of any aid.

On the other side of the coin, tough times in the Republic of Ireland means

less demand for UK goods and services.

This is potentially damaging given that the Republic is among the UK's largest

trading partners.

According to UK government figures, trade with the country exceeds total UK

trade with Brazil, Russia, India and China. And every man, woman and child in

the Republic spends an average of 3,607 per year on British goods, it added.

What is the Republic of Ireland doing to try to help its economy?

The country's government has tried to draw a clear line between problems with

its banking system and problems with its deficit.

That is because it feels confident that the measures it has already taken - and

more crucially those it is set to announce - will help put it on sounder

economic footing.

Europe Minister Dick Roche told the BBC the country would have its budget

deficit down to about 3% by 2014 (from the current 12%).

However, many observers have pointed out that this would be tough even in

robust economic growth - and so becomes harder when the economy is shrinking.

We already know there will be massive cuts - unprecedented in scale for the

Irish economy. Next week it is expected to publish a four-year fiscal recovery

plan which will be packed with specific details about what more it will do.

Also, the Republic's government would need to convince the markets that the

proposals could be implemented and that it would have the ability to sell the

tax rises and cuts to the public.

Sonia Pangusion, Senior Irish Analyst for IHS Global Insight said that,

socially, the people of the Republic were behind the austerity programme.

This was a problem in Spain, where government austerity plans were not

considered enforceable by the financial markets.

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Posted: 2010877@487.24

stranger

L'Irlande sous pression pour accepter un plan d'aide europ en

Bruxelles, bureau europ en - Une assistance financi re en faveur de l'Irlande

act e sur le principe, mais pas formellement activ e : c'est la r ponse que les

ministres des finances ont tent , mardi 16 novembre Bruxelles, d'apporter aux

march s affol s par la crise de la dette souveraine au sein de la zone euro.

Mais sans tre en mesure, ce stade, de forcer le gouvernement irlandais

demander le moindre soutien.

"Nous confirmons que nous agirons ( ) pour pr server la stabilit financi re de

la zone euro si n cessaire et que nous avons les moyens disposition pour le

faire", a indiqu Jean-Claude Juncker, le pr sident de l'Eurogroupe, l'issue

de la r union mensuelle des grands argentiers de l'Union mon taire.

Il a t convenu, en accord avec l'Irlande, d'envoyer d s jeudi Dublin une

mission conjointe de la Commission, de la Banque centrale europ enne (BCE), et

du Fonds mon taire international (FMI) pour n gocier un programme de

restructuration du secteur bancaire, mais aussi les modalit s d'une assistance

budg taire, "en cas de demande", a indiqu M. Juncker. Dans la soir e, le FMI a

confirm sa participation "afin de d terminer le meilleur moyen de fournir, si

n cessaire, un soutien permettant de contenir les risques sur les march s".

AGIR "TR S, TR S VITE"

L'Eurogroupe concluait peine ses d lib rations sur l'Irlande que Timothy

Geithner, le secr taire d'Etat am ricain au Tr sor, conseillait aux Europ ens

d'agir "tr s, tr s vite". Dans l'esprit des Etats-Unis, comme de la Banque

centrale et de la Commission europ ennes, et d'un nombre croissant d'Etats, il

s'agit d'aller vers une activation la plus rapide possible du plan d'aide, afin

d' viter une contagion de la crise l'ensemble des maillons faibles de la zone

euro, comme le Portugal ou l'Espagne.

Or le calendrier reste des plus flous, faute de requ te irlandaise. D'apr s

Jean-Claude Juncker, le gouvernement irlandais "doit se former une opinion d

finitive dans les prochains jours". Une assistance n'est "pas in vitable", a au

contraire clam le ministre irlandais des finances, Brian Lenihan, la sortie

de la r union.

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Posted: 2010877@487.52

stranger

Coulisses de Bruxelles, UE

Irlande : la zone euro essaye de calmer les march s sans bourse d lier

20101116 Eurogroup 23 Comme c tait pr vu, l Irlande, confront e la d fiance

des march s, n a pas demand l activation du Fonds europ en de stabilisation

financi re (FESF) au cours de la r union de l Eurogroupe qui a eu lieu lundi

soir, Bruxelles. N anmoins, les ministres des finances, soumis une forte

pression de la Banque centrale europ enne (BCE) et du Fonds mon taire

international (FMI) qui s inqui tent ouvertement de l tat du secteur bancaire

irlandais, responsable du gigantesque d ficit public de l Irlande (- 32 % du

PIB), se disent pr ts agir rapidement en cas de n cessit . En esp rant que ce

message suffira calmer les march s (photo: Jean-Claude Juncker, Klaus

Redling, le pr sident du FESF, Jean-Claude Trichet).

Afin de leur d montrer leur d termination agir, ils ont d cid , videmment

avec l accord de Dublin, d envoyer sur place une quipe compos e de la

Commission, de la BCE et du FMI pour d terminer le meilleur moyen de r pondre

aux risques de march , en particulier vis- -vis du secteur bancaire dans le

cadre du plan budg taire sur quatre ans et du budget venir , a expliqu

Jean-Claude Juncker. Il ne s agit donc pas, comme dans le cas de la Gr ce, de

passer au crible les comptes irlandais, mais d avoir une discussion courte et

cibl e sur la restructuration des banques locales, comme l a pr cis le pr

sident de l Eurogroupe et premier ministre du Luxembourg. En clair, l Union et

le FMI vont ausculter l tat r el des banques irlandaises, le principal facteur

de risque, et proposer des solutions qui ne passeront pas forc ment par une

aide europ enne.

Les travaux qui sont actuellement men s permettront de d terminer si une

20101116 Eurogroup 16 intervention du FESF (qui peut emprunter jusqu 440

milliards d euros sur les march s) est ou non n cessaire, a ainsi pr cis

Christine Lagarde, la ministre des finances fran aise, qui a d clar aux

journalistes pr sents, avec un grand sourire, qu elle tait heureuse de (les)

retrouver La mission conjointe de l Union et du FMI devrait d boucher sur

une proposition de solution destin e stabiliser le secteur bancaire dans les

prochains jours. Les consultations ont commenc depuis dimanche et "vont

s'intensifier partir de jeudi matin Dublin", a expliqu Christine Lagarde.

"Le travail va consister r fl chir aux m thodes, finaliser le travail de v

rification des faits, des risques encourus, de la situation des banques, de la

n cessit de la restructuration de chacun de ces acteurs bancaire". En tout

tat de cause, on n est pas dans le cas de la Gr ce, la dette souveraine est

sous contr le , a-t-elle ajout .

In fine, la d cision de demander une activation ou non de l aide appartient l

Irlande, comme l a reconnu Lagarde, m me si la mission des Europ ens et du FMI

sur place peut tre consid r e comme la pr paration d un plan d aide Dublin,

a ajout Ollie Rehn, le commissaire aux affaires conomiques et mon taires. Or,

le gouvernement de Brian Cowen n est absolument pas d cid faire appel au

Fonds : outre qu il dispose de liquidit s jusqu en juin prochain, il n a aucune

envie de se retrouver, comme la Gr ce, sous tutelle europ enne et contrainte d

adopter des mesures fiscales dont il ne veut pas, comme l augmentation de l imp

t sur les soci t s, un consensus national. Le premier ministre a r p t ,

mardi, devant son Parlement que l'Irlande n'a pas demand d'aide ext rieure

, mais c'est dans notre int r t tous de trouver une solution cr dible,

efficace et r alisable, qui rassurera les march s et restaurera la confiance et

la stabilit .

Si certains pays europ ens, comme le Portugal et l Espagne, qui craignent une

extension de l incendie, militent pour une intervention du FESF, tous ne sont

pas persuad s de son utilit dans le cas irlandais. D autant que, comme me le

faisait remarquer, d sabus , un fonctionnaire fran ais, l aide accord e la Gr

ce n a pas chang grand-chose l attitude des march s : les Grecs viennent

d emprunter 3 mois un taux prohibitif de 5 %. Or, les investisseurs, gr ce

notre garantie, sont certains de r cup rer leur mise. Pourtant ils exigent un

rendement de 5 % . C est vraiment : face : j encaisse les gains. Pile : tu

me garantis contre les pertes , temp tait cet apr s-midi un diplomate fran

ais.

20101116 Eurogroup 08 Une intervention du Fonds risque, en outre, d tre

politiquement difficile vendre : pourquoi faire payer par les citoyens europ

ens le choix du gouvernement irlandais de sauver tout prix ses banques et de

ne pas restructurer sa dette bancaire ? Christine Lagarde a eu beau affirmer qu

une activation du Fonds ne pouvait tre assimil e un sauvetage des banques

irlandaises, puisque l aide serait vers e l tat, on ne voit pas tr s bien

qu elle serait la diff rence.

Selon plusieurs journaux am ricains et britanniques, Londres serait dispos

pr ter plusieurs milliards de livres l Irlande pour l aider sauver ses

banques et stabiliser les march s. On comprend cet empressement, les banques

britanniques tant, avec leurs cons urs allemandes, les plus expos es la

dette irlandaise La solution id ale serait, si l information est v rifi e, un

plan de restructuration europ en et une aide financi re bilat rale britannique.

Comment les march s vont-ils r agir la r union de l Eurogroupe ? La d tente,

depuis plusieurs jours, de l cart de taux d int r t ( spread ) entre les

dettes allemande et irlandaise, montre que les march s sont persuad s que les

ministres des Finances de la zone euro allaient activer le FESF. Ils pourraient

tre d us et donc attaquer la dette souveraine irlandaise. Ou se satisfaire de

cette promesse d aide et donner du temps au temps. R ponse dans la journ e.

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Posted: 2010882@440.86

stranger

Irish Republic to get bail-out loan, says central bank

Irish Central Bank governor Patrick Honohan has said he expects the Irish

Republic to accept a "very substantial loan" as part of an EU-backed bail-out.

Mr Honohan told RTE radio he expected the loan to amount to "tens of billions"

of euros.

The final decision will be up to the Irish government, which has yet to

comment.

Mr Honohan's comments come as a team of international officials meet in Dublin

for further talks on the debt crisis.

Representatives from the International Monetary Fund, the European Central Bank

and the EU will meet the Irish government, which has denied that it has asked

for aid.

'Game over'

An EU handout would be seen as a big loss of face for the Republic -

essentially meaning that its survival and solvency was reliant on Brussels.

But BBC business editor Robert Peston said that in terms of Irish resistance to

a bail-out, this was "game over".

"The Irish government could not conceivably go against the advice of its

[eurozone] partners and its central bank," he said.

Start Quote

Ireland's Taoiseach and finance minister no longer have any room for manoeuvre

(some would argue)

End Quote

Were it to do so, commercial customers of Irish banks would accelerate

withdrawals which would be devastating, he said.

BBC Ireland correspondent Mark Simpson added that it could be "a fortnight

until we see what these loans look like".

Meanwhile, French Finance Minister Christine Lagarde told the BBC it was for

the Irish government to determine whether it needed a bail-out.

"It's a matter of national sovereignty within a group that is clearly

supportive, that has a joint common good which is our currency. I trust the

Irish government to be extremely sensible," she told Radio 4's Today programme.

"The real issue is: will the economy stand on its feet? Will the euro stand

under the current circumstances in Ireland? And that's what the Irish

government really has to focus its attention on."

European stock markets rose in morning trading as investors' confidence grew

that an Irish rescue package would emerge in the coming days.

Leading share indexes in London, Paris and Frankfurt were all up more than 1%.

Borrowing costs

Fears about the stability of Irish banks has led to a rise in the price the

Irish government - which has pumped billions into its banks - pays to borrow

money.

Other eurozone countries that are also perceived as weak are seeing their

borrowing costs rise too.

European 10 year bond yields

The latest discussions in Dublin follow a meeting in Brussels on Wednesday of

European finance ministers.

The ministers said they had not held detailed discussions on a potential

bail-out for the Irish Republic - because the Irish government had not

requested financial help.

Without such a request, no assistance can be given, despite the wishes of some

fellow eurozone countries, such as Portugal and Spain, who would like the issue

to be settled in order to stop disorder on the financial markets.

The Irish government has stressed it does not need to borrow money for public

spending until into next year.

But it has a gaping budget deficit and will shortly announce another severe

round of spending cuts and possible tax rises to plug the gap.

And the country's banks have recently become heavily dependent on loans from

the ECB.