BRUSSELS/DUBLIN, (Reuters) – A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources said on Friday, but experts warned a rescue may not be enough to prevent contagion to other euro zone members.
Europe’s single currency fell back late in the day and the risk premium investors demand to buy Irish debt instead of benchmark German bonds remained high as optimism about an aid deal was tempered by a sense the crisis is far from over.
A poll of participants at a high-level banking congress in Frankfurt showed nearly three quarters believe the turmoil that has shaken Europe’s currency bloc for much of the past year would rage on even after an Irish rescue, ensnaring other financially weak countries like Portugal.
“As long as the fundamentals don’t improve, the pressure will continue on other countries too,” said Daniel Gros, head of the Centre of European Policy Studies in Brussels. “Many believe the euro zone is just moving from one crisis to the next.”
In Washington, U.S. Treasury Secretary Timothy Geithner disagreed. Asked in an interview on Bloomberg Television whether an aid package for Ireland from the EU and IMF could be the last bailout needed, he said: “I think that is absolutely possible.”
“It is within the capacity of the Irish Government and the European authorities to achieve, and I believe they will achieve that because this government, Ireland, has demonstrated that they are willing to do some very, very difficult, very, very hard things to dig their way out of this mess,” he said.
Ireland’s central bank chief has acknowledged the country needs a loan running into the tens of billions of euros to shore up a fragile banking sector that has grown dependent on ECB funds and seen an exodus of deposits over the past six months.
Allied Irish, once the country’s largest listed lender, announced that customer accounts had plunged by 13 billion euros so far this year and that mortgage book arrears had continued to rise in the third quarter.
AIB is relying on the Irish government to bail it out after years of loose lending to property developers left it with a gaping capital hole in excess of 10 billion euros.
“General funding market conditions in recent months have become increasingly challenging,” the bank said in a statement.
Last week, larger rival Bank of Ireland signalled a 10 billion euro outflow of corporate deposits in the third quarter while bancassurer Irish Life & Permanent said it had suffered a 600 million outflow in the same period.
Unlike Bank of Ireland and Irish Life & Permanent, AIB did not indicate if the deposit withdrawal had tailed off.
