Euro sinks to two month low

The euro sank to a two-month low in a nervous first reaction to a multibillion-dollar bailout for Ireland that European governments hoped would steady the under-pressure currency.

Finance ministers who sealed the 85-billion-euro (Dh415) deal at emergency talks in Brussels yesterday were anxious to reassure Asian markets and head off any moves on Portugal and Spain, which are considered the next most vulnerable economies.

But even as international financial leaders stepped forward to endorse the agreement, currency dealers in Tokyo gave their own verdict.

After early gains, the single currency slipped to 1.3181 dollars today, its lowest level since late September, before rebounding above 1.32 dollars in a volatile session.

Under the deal, Ireland's crippled banks will immediately receive 10 billion euros but will be subject to a "fundamental downsizing", the government said in Dublin.

They will be able to draw on a total of 35 billion euros out of 67.5 billion euros in external aid from the European Union and the International Monetary Fund.

But the first 17.5 billion comes from an Irish "treasury cash buffer and investments of the National Pension Reserve Fund," an EU statement said.

Irish Prime Minister Brian Cowen insisted he had got "the best deal available" for Ireland and its people, a day after mass street protests in Dublin against austerity cutbacks introduced to qualify for the bailout.

But opposition leaders denounced the deal, with Irish Labour Party leader Eamon Gilmore saying it amounted to "a national sell-out." Tens of thousands of protesters had already marched in Dublin Saturday to protest against the agreement.

Business leaders, however, welcomed the deal.

The governor of the Central Bank of Ireland, Patrick Honohan, said the international support "underpins a clear economic and financial policy path for Ireland."

Danny McCoy, head of the Irish Business and Employers Confederation (IBEC), said it provided "much-needed certainty".

And Bank of France governor Christian Noyer endorsed the plan today as he spoke to reporters at a financial forum in Tokyo.

"The package has been clearly designed by the IMF and the EU and you can rely on the multi-decade experience of the IMF to put in place plans which are totally credible," he said.

"There is absolutely no doubt that this plan will work."

IMF chief Dominique Strauss-Kahn said he had no doubt Ireland would keep up its end of the deal.

"Supported by substantial financing, this programme can underpin market confidence and bring Ireland economy back on track," he added in a statement yesterday.

Non-euro countries Britain, Denmark and Sweden will provide bilateral loans totalling around five billion euros.

As part of the deal, Ireland was given an extra year, until 2015, to bring its 2010 deficit of 32 per cent of gross domestic product back within the permitted three percent limit.

Ireland's coalition government unveiled a four-year plan last week that signalled spending cuts worth 10 billion euros and tax rises worth five billion euros, triggering the mass protests at the weekend.

Mr Cowen said he expected Ireland to pay an average interest rate of 5.8 percent a year on the loans, subject to market conditions.

"Without these loans the necessary tax increases and spending cuts would be far more severe," Mr Cowen insisted.

Brussels said it would also consider re-scheduling repayments on Greece's 110-billion-euro loans, as part of broader moves to convince bond buyers to keep interest rates at manageable levels.

Greece was the first recipient of a major EU-IMF bailout earlier this year.

The EU ministers also drew up rules for future rescues that, under stringent IMF terms, would hit government bond investors.

They agreed that the private sector would share the burden in future bailouts after an existing eurozone emergency fund worth 440 billion euros expires in 2013.

"Rules will be adapted to provide for a case-by-case participation of private sector creditors, fully consistent with IMF policies," said a statement.