Cowen's tactics delay IMF vote on Ireland

By @ibtimes on

The International Monetary Fund postponed approving a multi-billion euro loan for Ireland on Friday after Prime Minister Brian Cowen said he would seek parliamentary approval for the bailout.

Cowen is expected to get the 85 billion euros joint IMF/EU rescue package through the lower chamber next week but his politically charged decision to put it to a vote creates uncertainty and delays that investors will not appreciate.

Highlighting the depth of Ireland's crisis, data on Friday showed the country's banks' growing dependence on funding from the European Central Bank and its own central bank with estimated borrowings of some 140 billion euros, representing 30 million euros for every person living in the country.

The bailout is meant to wean Irish banks off such assistance halting an outflow of corporate deposits and allowing them to return to term funding markets again.

But analysts said banks' addiction to such funding would continue until they laid out plans to shrink their assets, a requirement of the emergency aid, and started selling off loans next year.

Given all the noise that was taking place I think until the restructuring plans become clearer and implementation commences ... I think realistically it's not going to happen until then, said Jim Ryan of Dublin-based Glas Securities.

The best one can hope for in 2010 is to stop deposit outflows and then in 2011, when matters become clearer, we should start to see some inflows again.

The IMF's board will consider its 22.5 billion euros portion of the bailout on Thursday assuming Ireland's parliament passes the package in a vote on Wednesday.

Finance Minister Brian Lenihan told parliament he expected Ireland to start accessing external funding early next year.

The premium investors demand to hold Irish debt over benchmark German paper rose 9 basis points to around 540 bps on Friday amid a slowdown in ECB bond buying.

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Emboldened by the ease at which a record austerity budget is passing through parliament, Cowen is clearly confident the bailout will get the thumbs up from the chamber despite his razor-thin majority and plunging popularity.

Lawmakers passed legislation by 79 votes to 74 on Friday to lower the minimum wage and cut ministers' salaries and public sector pensions, the latest stage in passing the 2011 budget, which is a crucial plank of the IMF/EU deal.

The cutbacks and tax hikes mark the start a four-year cycle of austerity that will squeeze 15 billion euros out of an economy still smarting from a prolonged and painful recession.

Cowen's decision to put the IMF/EU bailout to a parliamentary vote, after previously saying he was not obliged to, is designed to put the main opposition parties under pressure ahead of a national election, likely in January or February.

The center-right Fine Gael party and the center-left Labour party have harshly criticized Cowen for seeking external funds, slamming the deal as a humiliating loss of sovereignty.

But both parties will have to work within the targets set down in the deal when they form a new government, as expected, in the first quarter of next year.

Lenihan told parliament that if the next government departed from the four-year plan it would do so at its peril.

There's no point in deluding ourselves about what must be done to ensure Ireland emerges from this crisis, he said. We have to accept there are no easy options.

Ireland has been transformed from one of Europe's brightest economic stars to a regional sore point on the back of years of reckless bank lending which fueled a property bubble and brought the former Celtic Tiger economy to its knees.

Fitch ratings agency, which stripped Ireland of its 'A' credit status this week told Reuters Insider on Friday it would take the country several years to be back in the 'A' grade.

Fiscal consolidation will last at least three, if not four or five years and it will take them a long time to get back with workable public finances, Chris Pryce, Fitch's primary analyst for Ireland, said.

Irish people will have to tighten their belts more than they have tightened them, he said.

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