A serious rift has developed between the Irish government and Europe, as pressure grows on Ireland to access the EU stability fund.
The pressure is intensifying amid fears that Ireland’s troubles on the bond markets will spread to Portugal, Spain and Italy.
The European Central Bank (ECB) is believed to be among those explicitly urging the government to apply to the European bailout fund, which Frankfurt believes would calm the turmoil on the markets and lessen the funding pressures on our troubled banking sector.
The government has so far refused to heed the calls, insisting that it is fully funded until the middle of next year and has no need to access the stability fund. However, senior sources concede that, while the Exchequer funding position is comfortable, the problems the banks are facing in accessing cash on international markets is a major problem.
The Taoiseach’s official spokesman insisted yesterday that the government had no plans to seek support from the bailout fund, but informed sources confirmed that there was significant pressure from Europe and particularly the ECB. However, sources believe the government may still have support in important parts of the EU Commission if it wants to remain outside the fund.
It appears that contacts are ongoing to establish what kind of deal might be available to Ireland if we entered the fund, which is headed by Klaus Regling, the German banker who wrote a report on our banking crisis for the government earlier this year.
The government has argued that it has significant cash reserves, which it believes will enable it to ride out the current market antipathy towards Ireland.
This has seen the government’s cost of borrowing surge to record highs in recent weeks. It has also planned to access the National Pension Reserve Fund, if needed, to extend the time it could stay out of the markets.
However, Irish banks remain highly dependent on ECB support, and the ECB wants to see this dependence reduced.
Figures published last Friday showed that Irish banks had accessed funding of some €130 billion from the ECB and the majority of this - perhaps close to €100 billion -was for the six domestic banks. The ECB may judge that a more stable funding position for the Exchequer would allow the Irish banks to gradually return to borrowing money from the markets, reducing their reliance on its cash.
It is understood that intensive contacts have been under way between the ECB and the Central Bank on this funding position in recent weeks, and are continuing this weekend.
Intensive high-level contacts between Dublin and Brussels are also continuing in advance of a meeting of eurozone finance ministers on Tuesday. Commission officials have been in close contact with the Department of Finance in recent weeks, as the government seeks to finalise its four-year fiscal plan and Budget 2011, scheduled for December 7.
A government source involved in the discussions said this weekend that the four-year plan was unlikely to be published until the end of next week. This would mean that it will not be made public until after the Donegal South West by-election, which takes place on Thursday week. If the government loses the by-election, its Dáil majority will be reduced to two votes.
Ministers held four cabinet meetings last week in an attempt to agree the budget and the four-year plan. Sources involved in the process said that progress was being made, but much remained to be done.
However, The Sunday Business Post has learned that ministers are likely to agree a new levy on public sector pensions, as well as curtailing some of the benefits enjoyed by pensioners. It is highly unlikely that any cut will be made to the basic old age pension.
Traditionally, public sector pensioners’ income has been linked to current pay grades, usually at 50 per cent of the current figure. However, since the pension levy and the public sector pay cut of last year - which was not extended to pensioners - most public sector pensions have climbed above the 50 per cent of current salary level. Sources said that this anomaly would be pegged back in the budget.
14 November 2010
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