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Ireland faces $54bn bank bill, Spain downgraded

Dublin, September 30, 2010

Ireland disclosed a mammoth "final" price tag of nearly 40 billion euros ($54.33 billion) on Thursday for bailing out its distressed banks and said it would have to make more drastic budget savings.

As markets contemplated Dublin's ever growing fiscal hole, ratings agency Moody's cut Spain's AAA top-notch credit rating to Aa1, citing the budget impact of slower economic growth.   

The downgrade was widely expected and followed similar moves by Standard's and Poor and Fitch.

Portugal -- the other euro zone nation in the markets' cross hairs -- announced late on Wednesday new austerity measures for 2011 designed to reassure bond markets that have driven its borrowing costs to near record levels.   

Ireland's central bank estimated the worst case cost of winding down nationalised Anglo Irish Bank at 34 billion euros and Prime Minister Brian Cowen's battered government said it would have to inject 5.4 billion euros more in taxpayers' money into Irish Nationwide building society.   

The euro slipped against the dollar as traders took stock of the impact on a country that was once the EU's fastest-growing economy but will now be shackled by a public debt burden of nearly 99 percent of gross domestic product.

But overall, financial markets reacted calmly, assuaged by the fact that Moody's does not now expect to cut Spain's debt rating further while traders said a bill of up to 35 billion euros for Anglo Irish had been priced in.

The premium investors demand to buy Spanish government bonds rather than euro zone benchmark Bunds actually fell while the Irish/German bond yield spread was unchanged versus Wednesday's settlement close at 466 bps.

A copy of the Spanish budget, obtained by Reuters, showed the government aims to cut its net debt issuance in 2011 to 43.3 billion euros from the 76.2 billion originally planned for 2010.

Economy Minister Elena Salgado will present the full budget for 2011, the bulk of which is already known, at 0940 GMT. On Friday, she announced cuts of 7.9 percent across public spending and cuts of an average 16 percent for government departments.        

Finance Minister Brian Lenihan said the bill for Ireland's banking crisis was "horrendous" but it brought to a close the public's response to the disaster.

He said the state would also probably take a majority stake in Allied Irish Banks, which needs an extra 3 billion euros in capital by the end of the year.

The level of state support for the banking system remained "manageable", he said, even though it will push the 2010 deficit up to an unprecedented 32 percent of gross domestic product -- more than 10 times the European Union's ceiling.   

The huge bill for Anglo was well above Dublin's previous official estimate of 25 billion euros but in line with a 35 billion euro worst case scenario by Standard's and Poor.

Lenihan said the government remained committed to reducing the deficit below the EU limit of 3 percent of GDP by 2014 and would outline a four-year budget plan in early November, something EU officials have pressed for. - Reuters




Tags: Ireland | Budget | Dublin | bank credit |

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