Going down: there are fears about the break up of the euro

Recriminations about today's announcement on the costs of Ireland's €85bn EU-IMF bailout are already starting as an eminent European economist said he was wary of accepting some high-value euro bank notes for fear that the crisis leads to a default of sovereign debt and the break-up of the euro.


Gabriel Stein, chief European economist at London's Lombard Street Research, told the Sunday Tribune he refuses to hold euro bank notes issued by some national euro issuers, such as Greece, which can be identified from the serial numbers, because of rising fears that, if the Irish and Portuguese crises intensify, some countries could be forced out of the eurozone.


The interest rate Irish citizens will pay on the multi-billion-euro loans will start at 5.5% and may rise as high as 7.5%, the Sunday Tribune understands. But the effective mortgage repayments will be stretched over longer than three years, possibly as long as nine years, to ease the huge burden of meeting the annual interest bill in any one year. Even though the unencumbered €18bn of assets in the National Pension Reserve Fund will be pledged, the Irish bailout will nonetheless be costlier than the 5.2% average annual rate Greece has been paying since May to tap its €110bn bailout over three years.


The bailout terms will again put the spotlight on the decision of finance minister Brian Lenihan to protect most senior bank holders, experts say.


Mike Flynn, a former director at the European Bank for Reconstruction and Development, said Brian Lenihan failed to manage the banking crisis by favouring private bank bond-holders. "We are paying back debts that are not ours," said Flynn.


The state has issued guarantees to cover at least €20bn in private bond debt alone this year, leaving only an estimated €30bn of all types of private bond debt in the Dublin banks, experts say.


The bailout costs and the scale of the Irish banking crisis, as Portugal teeters this weekend on the brink, will lead to Ireland failing to pay back all its sovereign debts, predicted Ben May, European economist at Capital Economics.


"In the long run we are struggling to see how Ireland can get out of this without [the sovereign] defaulting. There is a need in the short term to take what is prescribed by the EU and IMF because otherwise the outcome is even worse," he said.


Ireland was the third-most likely state in the world to default on sovereign debt, and the risk of holding Irish bank bond debt was rising amid rumours the IMF would force haircuts on a limited number of private Irish bank bond-holders, CMA Datavision market figures suggested this weekend.


Luca Cazzulani, one of the most senior sovereign bond market commentators in Europe, said today's announcement would pave the way for Ireland to rejoin the sovereign debt markets in a couple of years but that the Irish banks would continue to require billions of euro from the European Central Bank and the Irish Central Bank to keep going day-by-bay. "It is tense," he said.


Starting in early summer, the run on banks caused by corporates and individual savers shifting their money out of Irish banks picked up again and led to the intervention of IMF and EU officials 10 days ago.


Other senior sources linked to the Irish bond market angrily this weekend said Ireland had "thrown away" its public sovereignty to protect private holders of senior bonds in Anglo Irish and other scandal-ridden banks.


"Even if bank bond-holders were made to pay in September and October, the sovereign could have been saved," said one of the most knowledgeable market experts on Irish policy, speaking on the basis of anonymity.


But another senior European source said rumours that bank bond-holders would be made to pay, even in a limited way, as part of the IMF bailout terms would have "big implications beyond Ireland" for banking markets.


Today's communique is expected to be brief but the government will come under immediate pressure to reveal all the details, including the mix of the interest rates on the loans and the duration of the loans.


Brussels sources have told the Sunday Tribune that Ireland may have to sign two separate memoranda of understanding, with the EC and the IMF, to get its bailout money. The board of the IMF in Washington, the 16 euro group members and the wider group of all 27 finance ministers will need to endorse the bailout in the coming weeks.


Société Générale in Paris, which helps sell Irish bonds for the government, said a default on Irish senior bank bonds would "make a big impact" in shifting private debts away from Irish citizens. However, the bank warned: "Even in Ireland it does nothing to fuse the yawning gap between welfare spending and tax collection."