Ireland committed itself on Wednesday to working with a European Union-IMF mission on urgent steps to help its stricken banking sector, a process that could lead to a bailout despite Dublin's deep reluctance.
A team from the European Commission, the International Monetary Fund and European Central Bank will travel to Ireland on Thursday to examine what measures may be needed if Dublin decides to seek aid, euro zone finance ministers said.
Irish Prime Minister Brian Cowen emphasised that the mission would look at what assistance Ireland might require, again rejecting suggestions his government was discussing a bailout.
"What we want to concentrate on now is in a focused way, over coming days, to sit down and see in what way can assistance be provided to ensure that these issues can be dealt with properly and appropriately," he told parliament.
"There has been no question of the government … (being) in a negotiation for a bailout," he said, dismissing the term 'bailout' as pejorative.
"The government is not going to be formally involved in applying or in engaging in a facility or making a decision of that type without that preparatory work being considered."
Irish Finance Minister Brian Lenihan said euro zone peers had welcomed his four-year, 15 billion euros budget-cutting strategy which he hopes to publish next week, suggesting he sees no need for further fiscal tightening.
But he admitted the banking sector needed help.
"What may be required may not in fact be an actual transfer of money now but demonstration of how much money can be made available if further difficulties materialise," he said.
Ireland has said the bill for bailing out its banks could top 50 billion euros but investors fear the final figure could be even higher given rising residential mortgage arrears, deposit outflows and higher funding costs.
Financial markets appeared unimpressed by Dublin's decision to reject sovereign assistance, with the premium investors charge for holding Irish 10-year bonds rather than German Bunds rising to a near-record 595 basis points.
Irish banks, pushed to the brink by the financial crisis and a property collapse, came under further downward pressure, with Allied Irish falling four percent. The bank's shares have lost 70 percent of their value this year.
It will issue a trading statement later this week.
The country's largest lender Bank of Ireland signalled last week that it had seen a 10 billion euros outflow of deposits from early August until the end of September.
LCH.Clearnet, a clearing house for sovereign debt, doubled its margin requirement on Irish bonds to 30 percent of net positions, an indication of the increased risk of default.
Underlining the fear that Ireland's problems could spread, Portugal's borrowing costs soared at a treasury bill auction, with yields for 12-month paper jumping more than 150 basis points from a tender earlier this month.
Lenihan dismissed suggestions that Ireland should raise its ultra-low 12.5 percent corporation tax rate to help cut its debt. Higher-tax countries, including Britain, have long seen the Irish rate as a form of unfair competition.
"Of course our corporate tax rate is safe," he said.
But the euro zone is acting tough with Athens — on Tuesday ministers told Greece to cut its spending further to meet budget deficit reduction targets agreed as part of its bailout — and could attach stringent conditions to any Irish aid.
The Irish government is hoping to avoid a humiliating rescue that could further weaken its grip on power, with a by-election scheduled for Nov. 25, a vote that could reduce the government's parliamentary majority to just two seats.
INEVITABLE?
While Ireland made no request for immediate EU rescue, resisting pressure to follow in Greece's footsteps, economists said a state bailout remained a probability even though its public borrowing needs are funded until mid-2011.
"Will Ireland dig its way out of this hole without support?" asked Commerzbank's Peter Dixon in a research note.
"Alas probably not, because it has lost market confidence … In the absence of measures to restructure the banking debt, we see a high probability that Ireland will ask for European Financial Stability Facility funding early next year."
EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.
Euro zone sources said there was an agreement in principle to trigger aid when the joint mission completes its work — perhaps in days — and the aid would not be just for the banks.
Irish citizens expressed alarm at the developments. "I was talking to a lady yesterday and genuinely she was saying 'I nearly had a heart-attack watching the news, that the country's going to be taken over,'" said Andy, a public sector pensioner.
After Greece's near collapse, the stakes are high. European Council President Herman Van Rompuy, who heads the body that groups the EU's 27 national governments, said the EU's future could be at stake, although others played down those risks.
Britain, whose banks have around $150 billion of exposure to Irish debt, said it stood ready to help, although it was unclear what steps it might take to assist Ireland.
"Ireland is our closest neighbour and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," Chancellor of the Exchequer George Osborne told reporters ahead of an EU finance ministers meeting in Brussels.
