By Carmel Crimmins
DUBLIN (Reuters) - Ireland disclosed a "horrendous" worst case price tag of over 50 billion euros ($68 billion) on Thursday for bailing out its distressed banks and said it would have to make more drastic budget savings.
Fellow euro zone debtor Spain lost its last AAA credit rating as Moody's cut it by one notch to Aa1. Its Socialist government, unbowed by Wednesday's general strike, unveiled full details of a tough austerity budget for 2011 with much reduced borrowing in a drive to boost market confidence.
Portugal, the other euro zone nation in the markets' cross hairs, announced new spending cuts and tax rises for next year late on Wednesday designed to reassure bond markets that have driven its borrowing costs to near record levels.
The euro dipped briefly against the dollar after Dublin revealed its ever growing fiscal hole, but the 16-nation currency soon bounced back and investors reacted calmly overall, having largely priced in the latest bad news.
The Spanish downgrade had been widely anticipated after similar moves by Standard and Poor's and Fitch and investors were relieved that Moody's said the outlook was now stable.
The European Commission praised Ireland's full disclosure and said deficit-cutting measures announced by Spain and Portugal should boost their credibility and enable them to start reducing their swollen debts.
"Clearly these measures go in the very right direction," European Central Bank President Jean-Claude Trichet said of the Portuguese package.
The chairman of euro zone finance ministers, Jean-Claude Juncker, said he did not believe Ireland would need to call on the bloc's emergency rescue fund for countries in difficulty.
Irish central bank governor Patrick Honohan agreed, and Portugal's finance minister said the fresh austerity moves meant his country would not need to tap the stability fund either.
In a stark indicator of a two-speed economic recovery in the euro area, German unemployment fell to its lowest level in more than 18 years in September. The jobless rate was 7.5 percent compared to 20 percent in Spain.
'STRESS CASE'
Ireland's central bank estimated the "stress case" cost of winding down Anglo Irish Bank at 34 billion euros. Prime Minister Brian Cowen's fragile government said it would have to inject another 2.7 billion euros into Irish Nationwide building society, on top of 2.7 billion already earmarked.
Finance Minister Brian Lenihan said the state would probably raise its stake to a majority in Allied Irish Banks, which needs an extra 3 billion euros in capital this year.
"We have to bring closure to this matter and that is what we have done today," Lenihan said. "Yes of course these figures are horrendous, but they can be managed over a 10-year period."
Dublin-based Davy Stockbrokers said the gross cost of restructuring the banks under a base scenario was now 46 billion euros, which would rise by 5 billion under the "stress case" for Anglo.
The "Celtic Tiger" that was once the EU's fastest growing economy will be shackled by a public debt burden of nearly 99 percent of gross domestic product, which analyst Donal O'Mahony of Davy Capital Markets said would peak at 105 percent in 2012.
Lenihan said the level of state support for the banking system remained "manageable," even though it will push the 2010 deficit up to an unprecedented 32 percent of GDP -- more than 10 times the European Union's ceiling.
Dublin remained committed to reducing the deficit below the EU limit of 3 percent by 2014 and would outline a four-year budget plan in early November as sought by Brussels.
Lenihan said Ireland, which is fully funded until June 2011, would cancel planned bond auctions in October and November and only return to the capital markets in 2011.
The premium investors demand to buy Spanish and Portuguese government bonds rather than benchmark Bunds fell while the Irish/German bond yield spread was unchanged from Wednesday's close at 466 bps.
PAIN IN SPAIN
In a sign of a healthier outlook for euro zone money markets, the European Central Bank doled out far less than predicted in six-day funds to banks, ensuring a bigger than expected drop in excess liquidity.
Trichet said markets saw the fact that banks were no longer asking for the same level of funds as a positive element.
Spanish Economy Minister Elena Salgado announced a 7.9 percent overall reduction in public spending next year, when the government also aims to cut net debt issuance to 43.3 billion euros from the 76.2 billion originally planned for 2010.
The Spanish downgrade illustrated the dilemma of peripheral euro zone governments that risk prolonging an economic slowdown with harsh measures required to reduce swollen budget deficits.
That could create a vicious circle of low growth and depressed revenue, making it harder to pay off public debt.
Trade unions staged strikes and demonstrations against austerity measures in several European Union countries on Wednesday, but analysts said the protests were too small and disparate to make governments change course.
(additional reporting by Axel Bugge in Lisbon, Nigel Davies in Madrid, Andras Gergely and Padraic Halpin in Dublin, Marcin Grajewski and Jan Strupczewski in Brussels; writing by Paul Taylor; editing by Mike Peacock)
($1=.7362 Euro)
