Ireland insists it doesn’t need EU help

The Irish Republic has insisted it does not need European Union assistance amid speculation it is under pressure to use an EU bail-out fund.

Dublin said it was in contact with “international colleagues”.

But it dismissed reports that it may approach the European Financial Stability Fund (EFSF) for up to 80bn euros (£68bn; $110bn) as “fiction”.

Ireland’s difficulties will be discussed by EU finance ministers in Brussels on Tuesday.

However, the BBC’s Europe editor Gavin Hewitt said that high-level talks had already begun, involving European Commission President Jose Manuel Barroso and his economy commissioner Olli Rehn.

“Some EU officials believe it would be better for the Republic to accept a bail-out package now rather than to allow uncertainty to continue,” Gavin Hewitt said.

Brussels fears that any delay risks repeating the Greek crisis that earlier this year threatened the entire eurozone, he added.

In May, the EU agreed a 110bn-euros bail-out for Greece. Officials will be in the country this week to decide whether to release the final tranche of the money.

But over the weekend, Greek Prime Minister George Papandreou signalled it may have to ask for permission to delay its repayments.

The scale problems still facing Greece were further underlined by the latest official European figures which showed that its budget deficit in 2009 was markedly higher than previously stated.

Some reports suggest that the Irish Republic could seek help for its banking sector alone, rather than asking for help at a government level.

This, say observers, would allow them to maintain control of the economy, while avoiding the embarrassment of the country being rescued by the EU.

However the EFSF cannot be used to lend directly to banks, said European Central Bank vice president Vitor Constancio.

“The facility lends to governments and then the governments of course may use the money to that purpose in similar lines that exist for Greece,” he said.

“The same could be done for Ireland.”

The Irish government has all but nationalised the country’s banking system, which had lent recklessly to property developers at a cost of 45bn euros.

The price of Irish bonds – essentially IOUs sold by the government to fund state spending – were little changed in early trading on Monday.

The yield on the bonds has soared in recent weeks, indicating that investors believe there is an increased risk of the Republic defaulting on its debt.

There are concerns that if the EU does not intervene, there could be contagion elsewhere in the eurozone.

Last week, anxiety over the Irish Republic spread quickly in the financial markets to other heavily indebted eurozone nations, including Portugal and Spain, driving up their borrowing costs.

And the shares of banks, including Royal Bank of Scotland, which have exposure to Irish government debt have fallen in the past week.

A spokesman for the Irish finance department said the country was “fully funded till well into 2011”.

Meanwhile trade and business minister Batt O’Keefe said the Republic must show it could “stand alone”.

“It’s been a very hard-won sovereignty for this country and this government is not going to give over that sovereignty to anyone.”

However, Jim Power, chief economist at the financial services group Friends First, said that “the reality is Ireland is now becoming a serious source of instability in the eurozone”.

“At the EU level, there will be a huge imperative to try and stabilise this thorn in the side and one way of doing that would be to force Ireland to access the EU fund,” Mr Power added.

Under procedures agreed in May, a eurozone country has to ask for help in order to trigger a bail-out.

“Unfortunately, for those hoping to either prevent contagion – or to push through new rules regarding the crisis-resolution mechanism – Ireland has shown little interest so far in asking for assistance,” said analysts at BNY Mellon.

Since 2008, the Irish Republic has suffered a dramatic collapse of its property market.

House values have fallen between 50% and 60% and bad debts – mainly in the form of loans to developers – have built up in the country’s main banks, bringing them to the verge of collapse.

The country has promised the EU it will bring its underlying deficit down from 12% of economic output to 3% by 2014.

Its current deficit is an unprecedented 32% of gross domestic product, if the cost of bad debts in the Irish banking system is included.

The Irish government, which has a flimsy majority in parliament, is expected to publish another draconian budget on 7 December.

This will impose spending cuts or tax rises totalling 6bn euros to bring the deficit down to between 9.5-9.75% next year.

Investors fear the budget cuts are likely to worsen the country’s already deep recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

The government’s parliamentary majority is likely to be cut to only two on 25 November, when a by-election will be held that the governing Fianna Fail party is likely to lose.

The government had left the Donegal South West seat empty for 17 months but the Republic’s second-highest court recently ruled that the delay was unreasonable. Three other by-elections are also required.