Irish Republic 'to get 85bn-euro EU and IMF bail-out'

Protesters outside government buildings in Dublin Planned austerity measures have proved unpopular with the Irish people

The EU and IMF have extended 85bn euros of emergency loans to the Republic of Ireland, according to reports on Irish state television.

But the Irish finance ministry claimed the report is premature, and details of the bail-out are still being finalised.

The widely anticipated bail-out package comes after a day of sharp falls in global share prices and the euro.

Markets are concerned that despite the rescue package, the debt crisis could spread to other European countries.

Dublin is also expected to publish a four-year austerity plan on Wednesday amid fears the government could fall.

"It's just speculation," said a finance ministry spokesman, referring to the report of the bail-out terms by Irish state broadcaster RTE.

"The technical teams are still trying to work out what the package will be. We are expecting these discussions will take a couple of weeks. They only started on Monday."

Banks buyout

The rescue package would see the level of capital in the Irish banks being increased from 8% to 12%, according to RTE, in "a move to bolster confidence of depositors in the financial system".

It follows a long-running flight of wholesale depositors from the Irish banks, leaving them dependent on the European Central Bank for financing.

The new capital will provide the banks with a bigger cushion against losses.

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But it will mean the government all-but nationalising Bank of Ireland and Allied Irish Banks, as the government is likely to inject the money by buying new shares in them.

The government expects to end up with a majority ownership of Bank of Ireland, according to a report in the Financial Times.

It follows comments from the head of Ireland's central bank, Patrick Honohan, that the banks would effectively be "up for sale" by the government.

Markets doubtful

European markets fell steadily all day, with the FTSE 100 ending 1.75% lower. In New York, the Dow Jones ended the day down 1.3%.

And the euro has fallen 1.9% against the dollar to less than $1.34.

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Other factors also weighed on market sentiment, including renewed hostility between North and South Korea.

Bank stocks were particularly badly hit, as many are heavily exposed to the debts of Ireland, Greece, Portugal and other struggling European economies.

Among the worst affected were those in France, where Societe Generale fell 4.7%, and Spain, where Santander also fell 4.7%.

In Ireland, where banks suffered the second day of sharp falls, Bank of Ireland slumped 23%, while Allied Irish Banks fell 19%.

Painful plans

Analysis

The decorations are up for the festive rush at the Skycourt shopping centre in Shannon.

But the ghost of Christmas future is haunting shoppers who fear that austerity measures will put a dent in their wallets.

Uncertainty surrounds where the cuts will come from to pay for the estimated 90bn-euro rescue package - but that they will come is certain.

The butcher's shop is already selling cheaper cuts of meat. The florist is predicting her toughest trading for 15 years.

But there is a determination not to give in to doom and gloom.

"Christmas is for children," said one mother of two. "And they do not need to know about the worries we all have."

The four-year plan to be revealed on Wednesday is a precondition for the financing.

It will provide some detail of spending cuts and tax rises amounting to 15bn euros, including a hefty 6bn euros next year, with the aim of bringing the government's budget deficit down to a target of 3% of GDP by 2014.

Some hints of the plan's contents have been provided by an IMF report on European economic reform that has been published on the Fund's website.

The IMF recommends that the Republic should gradually cut unemployment benefits the longer a person is out of work.

It also said the country should review its minimum wage - one of the highest in the eurozone - to bring it in to line with the general fall in wage levels.

The findings were approved for publication on Monday by the same senior IMF official who has been leading the team negotiating with the Irish government.

Political risk

The Irish Finance Minister Brian Lenihan said the plan had now been finalised and passing the budget was now the "priority" for the government.

"This budget is needed for Ireland. We need to pass this budget," he said.

But doubts remain as to whether the Irish government will survive long enough to pass its 2011 budget, with parliament due to vote on 7 December.

The Taoiseach, Brian Cowen, has agreed to a call from the government's junior coalition partner - the Green Party - to hold early elections in January once the budget has passed.

However, two independent members of parliament on whom the government relies for its majority have suggested they may not support the budget.

And opposition parties - Fine Gael and the Labour Party - have demanded immediate elections before the budget vote.

Contagion worry

Investors are also concerned that other countries with high levels of debt, in particular Portugal and Spain, may also have to seek financial help.

The interest rate the Spanish government had to agree to pay to raise short-term funds rose sharply at a bond auction on Tuesday. The yield on longer-term bonds also rose, reflecting these concerns.

The difference between the cost of borrowing faced by the Spain and Germany - which is considered a benchmark - also reached a record.

Fears were not helped by Germany's Chancellor Angela Merkel, who said that Europe is "facing an exceptionally serious situation as far as the euro's situation is concerned".

"I don't want to paint a dramatic picture, but I just want to say that a year ago we couldn't imagine the debate we had in the spring and the measures we had to take" over Greece, Ms Merkel said.

The bail-outs have proved unpopular among some parts of the German electorate, many of whom are struggling to understand why they are bailing out the economies of other European countries.

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