Ireland accepts $113-billion bailout package

Reporting from London —  European officials rescued their second country in seven months Sunday, offering financially strapped Ireland a bailout package worth $113 billion in a bid to shore up confidence in the battered euro.

Dublin quickly accepted the emergency lifeline, hoping to calm anxious investors ahead of the opening of international markets Monday. The move was a humiliating climb-down for the Irish government, which had insisted for weeks that it did not need outside help to deal with its crushing public debt and decimated banking sector.

All eyes are now turned to Portugal and Spain, where, in many ways, the Irish bailout will face its true test. Fear that Lisbon and Madrid are also in danger of defaulting has led investors to dump those countries’ bonds and push up their borrowing costs in recent days.

Officials from the European Union and the International Monetary Fund are crossing their fingers that their rescue of Ireland will reassure investors of the euro’s soundness and head off the need for any bailouts on the Iberian Peninsula, especially of Spain, the EU’s fourth-largest economy.

“This program can underpin market confidence and bring Ireland’s economy back on track,” Dominique Strauss-Kahn, the managing director of the IMF, said in a statement.

Irish Prime Minister Brian Cowen defended the package as “the very best achievable outcome” for his country.

“I don’t believe there were any other realistic options,” Cowen said after the bailout was announced in Brussels following a hastily convened meeting of EU finance ministers.

“We are not an irresponsible country,” Cowen added. “We are a country that recognizes its international obligations.”

Ireland is the second of the 16 euro nations to request emergency aid, following a similar bailout worth about $140 billion for Greece in May. Dublin is grappling with a staggering budget deficit equal to 32% of gross domestic product, the highest in Europe, which was brought on by the government’s decision to assume the debts of Irish banks that went belly up when the real-estate market crashed.

The loan package allocates $46.6 billion to prop up Ireland’s banks, with about $13 billion to be taken immediately and the rest held in reserve. An additional $66.5 billion will go toward Ireland’s public finances.

More than half the funds will come from EU countries, including bilateral loans from Britain, Sweden and Denmark. Although those three countries are outside the Eurozone and maintain their own currencies, they have major trading interests with Ireland. British banks also have significant exposure to Irish debt.

“It’s absolutely in Britain’s national interest that we sort out Ireland, that we get some stability in the euro area,” George Osborne, the chancellor of the exchequer, told reporters in Brussels. “Britain will play its part in helping to bring that about.”

The IMF’s contribution to the bailout totals about $30 billion. Ireland is expected to put $23.3 billion of its own money into the rescue fund, partly by transferring money out of its pension reserves.

The average interest rate on the loans will be 5.8%, slightly higher than the rate for Greece.

A controversial proposal to force private bondholders to assume some losses, strongly advocated by Germany, did not make it into the current deal, out of fear that it would spur an even bigger rush by investors to ditch bonds from Ireland and other vulnerable countries. But the EU finance chiefs said that such “haircuts” for investors would begin in 2013 on a case-by-case basis.

In return for its financial lifeline, Dublin is expected to follow through with a series of drastic budget cuts that officials announced last week.

The austerity measures, the harshest in the Emerald Isle’s history, will save $20 billion by slashing thousands of public-sector jobs, raising taxes, cutting welfare and retirement benefits, and decreasing the minimum wage. International finance officials will monitor Ireland’s progress on a quarterly basis.

Taken together, the bailout and the austerity plan have proved something of a political suicide pill for Cowen. Many Irish label him a traitor, accusing him of pursuing reckless policies when he served as finance minister and, now, of handing Irish sovereignty over to international creditors, including the British, from whom Ireland fought a long battle for independence.

Cowen has only a razor-thin majority in Parliament, and some analysts wonder whether he will be able to muster enough votes to pass the budget next month.

Last week, after losing support from key members of the coalition government, Cowen promised to call an election in early 2011. Polls suggest that his party, Fianna Fail, which has ruled Ireland almost continuously since independence, will suffer a major rout.

“I can’t believe they haven’t stepped aside and let the people decide who they want to lead us out of this,” Dublin resident Peter Brigges, 32, said in disgust. “It’s just the height of clinging on for the sake of clinging on to your job and politics for the sake of politics.”

With Ireland out of immediate danger of collapse, some analysts predict that Portugal will soon be forced to ask for a bailout.

Portuguese banks are in far better shape than Irish ones, but the country suffers from sluggish economic growth and a large budget deficit. Official denials of the need for help sound uncomfortably familiar.

Even more worrisome for Europe is the prospect of a rescue for Spain, whose economy is bigger than that of Greece, Ireland and Portugal combined. Spanish officials, however, have succeeded in bringing down the public deficit through austerity measures, and the level of Madrid’s debt is far below the European average, which may assuage investors’ fears.

henry.chu@latimes.com

Special correspondent Genevieve Carbery in Dublin contributed to this report.