Anglo Irish rescue to bloat Ireland's budget deficit
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Ireland's government has warned that the rescue of troubled Anglo Irish Bank will cost as much as 34 billion euros, causing the country's public deficit this year to grow almost threefold to 32%.
AFP - Ireland warned on Thursday that the state rescue of Anglo Irish Bank could cost 34.3 billion euros, pushing the public deficit up to 32 percent of economic output this year.
The potential rescue bill, equivalent to 46.6 billion dollars, is roughly the same as Ireland's annual taxation revenues.
The news that the deficit could be equivalent to almost one third of everything produced by the country in a year comes amid mounting investor concern about soaring levels of eurozone state debt.
This week, the yield, or rate, on Irish government debt rose at one point to the highest level since the euro was created, signalling that the government could have trouble in financing its overspending.
Finance Minister Brian Lenihan defended the rescue, saying the "nightmare" collapse of Anglo Irish would have pushed the country into insolvency, in remarks redolent of the recent crises in Greece and non-eurozone country Iceland.
"Unfortunately this bank grew to half the size of our annual wealth and the failure of a bank of that scale would render the country itself insolvent," he told RTE state radio.
"That has been the nightmare with which this country has had to live since 2008 and that problem has to be addressed."
He acknowledged that the public deficit would balloon this year as a result, adding he would deliver a four-year budget plan in November to show how the government would slash the ballooning deficit.
"There will be a very substantial spike in Ireland's general government deficit in 2010 as a result of the capital support that we are providing to our banking system, totalling almost 20 percent of GDP (gross domestic product)," Lenihan added in a statement.
"On a purely headline basis our general government deficit for 2010 will be around 32 percent of GDP." That compared with the prior forecast of 11.6 percent.
Ireland's Central Bank said that the nationalisation of Anglo Irish Bank has cost about 29.3 billion euros, and it could need an extra 5.0 billion euros under a worst-case scenario.
Another bank in difficulty, Allied Irish Banks (AIB) would need to raise another 3.0 billion euros by the year-end, while another 2.7 billion euros will be injected into the nationalised Irish Nationwide Building Society.
Ireland's banking sector was ravaged by the global financial crisis, a fierce recession and a domestic property market meltdown. Leading banks had become grossly over-extended in lending to the property, and notably commercial property, market
At the same time, the eurozone member is struggling to maintain investor confidence in its ability to control its huge public debt and deficit, amid similar fears over Italy, Greece, Portugal and Spain.
Lenihan added that it was an "urgent" priority to strengthen the banks and boost investor confidence in Ireland's public finances.
"It is an urgent and immediate priority to reinforce international market confidence in our ability and commitment to restore our banking system to health and to secure the long-term sustainability of our fiscal position."
Lenihan stressed that Ireland remains "fully committed" to reducing its deficit below 3.0 percent of GDP by 2014.
"Today's announcement brings to a close the public response to this crisis... Of course these figures are horrendous but they can be managed over a 10-year period and they will be managed in that way," he told RTE.
Jean-Claude Juncker, the prime minister of Luxembourg who heads the eurogroup of finance ministers, said that he believed Ireland can resolve the crisis without help from the European Union.
"I don't think that Ireland will need to take refuge under the European umbrella," Juncker told reporters before a meeting of finance ministers in Brussels.
"We believe the Irish government can resolve its banking problems without the rescue fund."
European governments and the International Monetary Fund have set up a trillion-dollar warchest to help any eurozone state in fiscal trouble following the financial rescue of Greece in May.
Ireland was the first eurozone member nation to plunge into recession in 2008. It returned to growth in the first quarter but then shrank by a huge 1.2 percent in the second quarter, stoking fears it could slip back into recession.
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