Irish in talks for Greek-style bailout

IRELAND is in talks to receive emergency funding from the European Union and looks set to become the second eurozone country after Greece to require a rescue, it emerged last night.

Irish borrowing costs have shot to record highs this week on concerns about the former Celtic Tiger's ability to get under control a deficit swollen by bank bailouts. Worries private bond holders could be forced to shoulder part of the costs of any bailout by taking "haircuts" on holdings added to the crisis.

Officials in Dublin have denied in recent days they plan to tap EU funds and a finance ministry spokesman insisted Ireland had made no application for aid.

However, eurozone sources said aid discussions were under way, with one official saying it was "very likely" Ireland would get financial assistance from the EU facility set up after Greece was forced to seek aid in May. "Talks are ongoing and European Financial Stability Facility (EFSF) money will be used, there will be no haircuts or restructuring or anything of the kind," one eurozone source said. A second source confirmed the talks.

Going to the EU for aid would represent a humiliating setback for a country that posted some of the best growth rates in the 16-nation eurozone in its first decade of existence.

The global financial crisis, weak regulation of the banking sector and a property bubble fuelled by rock-bottom interest rates eventually caught up on Ireland. This year its deficit is projected to total 32 per cent of gross domestic product (GDP), easily the highest in Europe. Jean-Claude Juncker, the chairman of the Eurogroup forum of eurozone finance minister, said the EU was following the Irish situation very closely but that it was up to Ireland to decide whether to seek support.

He said there was no urgent reason to think Ireland would ask for aid.

Meanwhile, Irish premier Brian Cowen blamed Germany for worsening Ireland's woes by pushing the idea of asset value reductions for private bondholders in a future rescue mechanism that Berlin wants in place by 2013, when the EFSF facility expires.

Although Germany has made clear the new mechanism would only apply to debt issued after that date, the plan unnerved investors. "It hasn't been helpful," he said. "The consequence that the market has taken from it is to question the commitment to the repayment of debt."

Germany is expected to finalise its proposals for the new rescue mechanism next week, possibly discussing them with its eurozone partners at a meeting in Brussels on Tuesday.

Earlier yesterday, Irish finance minister Brian Lenihan said Ireland did not need to ask for EU help because of its substantial cash reserves.The state is well funded into June of next year, we have substantial reserves, so this country is not in a situation or position where it is required in any way to apply for the facility," he said.

"Why apply? It doesn't make any sense. It would send a signal to the markets that we are not in a position to manage our affairs ourselves."