EU Bailout On Deck For Ireland

After fighting it off for as long as it could, Ireland agreed to request financial assistance from the European Union Sunday. A bailout package from the EU and the IMF could total from 80 billion euros to 100 billion euros ($109-$136 billion). After initial optimism, early rallies turned to losses in European bourses Monday as traders pondered the impact of Ireland's uncertain financial future, and the possible risk of contagion.

An emergency meeting of Irish Prime Minister Brian Cowen's cabinet on Sunday announced that the country has agreed to request support from the EU while it embraces a strong austerity program expected to cut about 15 billion euros in spending by 2014.

Funds for the bailout will be provided by the European Financial Stabilization Mechanism (EFSM) and the European Financial Stability Facility (EFSF), emergency funding facilities activated in the wake of the 110 billion euro Greek bailout six months ago. The IMF will also be providing support.

Irish sovereign debt problems stem from its beleaguered banking sector, still reeling from the aftermath of a real estate bubble that popped in 2006. The country is not alone as it institutes austerity measures meant to stave off a default. The rest of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) have also been working to get their financial houses in order, and the Iberian Peninsula remains at risk due to strained finances.


Goldman Sachs ( GS - news - people ) analyst Francesco Garzarelli considers Portugal "a possible candidate for external help, should market pressure remain high," but remains optimistic about Spain because of its "different debt sustainability position, and the depth of its domestic market [which] should allow it to withstand market pressures."

A communique from the Irish government explained that it will require "further deep restructuring" of its banking system. "[The program] will build on the extensive measures taken by Ireland to strengthen its banking sector, via guarantees, recapitalization and asset segregation," read the announcement. "Irish banks will become significantly smaller," said Prime Minister Cowen.