DUBLIN, Ireland — Moving to contain fears of a debt crisis in Europe, the International Monetary Fund and European Union agreed Sunday to support an emergency bailout for near-bankrupt Ireland after the desperate government here abruptly requested a lifeline following days of denying that it needed help.
Ireland would become the second European nation in six months to require a multi-billion dollar financial rescue. The promise of aid — Irish Finance Minister Brian Lenihan said Ireland needed less than $137 billion — comes as major nations in the region have been pressuring Ireland to accept a bailout, fearing its woes could spread to other financially troubled nations in the region including Portugal and Spain and destabilize the euro.
After a hastily arranged conference call from Dublin, in which humbled Irish officials asked for help amid concerns of a run on the banks, EU financial leaders and the IMF agreed in principle to come to Ireland's aid. But the key details of the package — including its size and the conditions attached to it — could take days or weeks to hash out between Irish officials and a team of negotiators from the IMF and the EU.
As part of the deal, European officials said — and Irish Prime Minister Brian Cowen conceded — that the government would need to impose a major restructuring on its failing financial system as well as further austerity on the already hard-hit Irish public.
Banks will shrink
"Irish banks will become significantly smaller than they have been in the past and gradually learn to stand on their own two feet once again," Cowen said. At the same time, "the government has to increase our taxes and reduce our spending to levels we can afford."
Ireland's woes underscore how the reverberations of the global financial crisis are festering worldwide two years after the collapse of Lehman Brothers in the United States. Though Greece, which received a $141 billion bailout in May, buckled under the weight of government overspending, mismanagement and corruption, Ireland's emergency stems from troubled banks that are riddled with bad loans from a U.S.-style real estate bust.
The still-unknown extent of those losses is sapping confidence from investors and depositors, leaving Irish banks unable to borrow on global markets even as they have lost billions in deposits. At the same time, the government — which has already plowed $68 billion into the banks — is facing a huge budget gap from collapsed tax revenue and can no longer afford to prop up the banks itself.
Panicked investors have dumped Irish bonds in recent weeks, driving up the cost of borrowing for Ireland and a number of other European nations.
"The banks were too big a problem for the country," Lenihan said on Irish radio Sunday. "The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector."
After already forcing deep austerity on its citizens to help close the gap — cutting state salaries and slashing benefits to even widows and the blind — the Irish are now facing the prospect of even more pain. The EU and the IMF will need to approve what is set to be a four-year plan to cut spending by $20 billion.
Newspapers in Dublin are bemoaning the national embarrassment of a country that in recent years became known as the "Celtic Tiger" now going hat-in-hand to Europe and the IMF. Dublin's Sunday Independent labeled the past seven days "the blackest week since the (Irish) Civil War," with many here lamenting a steady stream of young Irish who are emigrating from the country in numbers not seen in years. Small bands of protesters opposed to the bailout scuffled with police in Dublin late Sunday.
The bottom line
Though analysts have said Ireland may need between $50 billion and $130 billion to recapitalize its banks and shore up the government's finances, Lenihan and Cowen both declined to say how much the government would ask for. Lenihan said the number, however, would come in below $137 billion.
With Ireland unlikely to win back the confidence of investors quickly, EU officials were preparing to offer Dublin a package of loans it could draw on for up to three years.
Ireland's request for aid will continue to test unity in the European Union, which will foot the bill for the bulk of the bailout from a $1 trillion rescue fund set up to aid financially ailing members after the bailout of Greece last spring.
But the public in Germany, for instance, was enraged by the EU bailout of Greece, in which Germans made the single largest contribution. Chancellor Angela Merkel will now need to sell another unpopular bailout, arguing that aid for Ireland is essential to preventing a broader crisis that could destabilize the euro.
German Finance Minister Wolfgang Schaeuble told the Deutsche Welle German news agency on Sunday that the terms of the deal would be "tough." Nevertheless, he said it would need to be big enough to ensure that "it's not just a shot in the arm, but that it will also help to solve the problem."
British Prime Minister David Cameron has also said London may take the extraordinary step of offering direct loans — reportedly up to $11.2 billion — to Ireland as part of an aid package, something that may not sit well with some in his Conservative Party.
What about Portugal?
Yet it remained unclear whether shoring up Ireland would be enough to avoid the need to bail out Portugal, another small nation whose weak economy and huge budget deficit has spooked investors. A greater test, however, will be whether ailing Spain, the fourth largest economy in the 16-nation euro zone, also needs help.
In for the roughest ride, however, is the Irish government itself.
Cowen is struggling to calm a furious opposition, as well as members of his own party and the Irish public, who are accusing him of mismanaging the crisis and misleading the nation about the need for an international bailout. He spent Sunday once again rejecting calls to resign, although observers said his government remained in danger of falling — something that could further complicate attempts to seal a deal with the EU and the IMF quickly.
All of last week, even as IMF negotiators were arriving in Dublin, Cowen continued to insist that Ireland could handle its problems on its own. Later, he seemed to suggest the government was entering talks only to ensure stability of the euro. Privately, Irish officials have said Cowen was staking out a negotiating position with the EU and the IMF.
Some analysts said Cowen's government — which is hanging on by a slim majority that is set to get slimmer this week after a regional election that his party is predicted to lose — may not last through the end of the year.
"The political situation is very tense, and it could make it more complicated to resolve the crisis," said Constantin Gurdgiev, an economic lecturer at Trinity College Dublin.