Irish rebuff bailout call in euro zone crisis

BRUSSELS (Reuters) - Ireland said it was discussing stabilization measures with its European partners on Tuesday and ways to cut its heavily indebted banks' funding costs in what a top EU official called a "survival crisis" for the euro zone.

A euro zone source said finance ministers of the 16-nation currency area meeting in Brussels would declare support for Dublin's austerity measures and express readiness to help financially, if it asks for aid, but would not announce any practical measures.

In Dublin, Prime Minister Brian Cowen rebuffed calls to request a bailout, saying the government was fully funded until mid-2011, and insisted that only the banks may need help.

"The cost of money is simply too high," Cowen said in parliament. "What we are doing is discussing with our European partners as to what stabilization (measures are) ... necessary."

European Economic Affairs Commissioner Olli Rehn said the EU executive, the European Central Bank and the International Monetary Fund were all working on ways "to resolve the problems of the Irish banking sector."

The euro fell by a cent to $1.35 and European stocks shed 2.2 percent on the day as investors worried that the meeting would not bring a solution to Ireland's debt crunch.

Senior officials agreed on a draft terms of reference on Ireland just before the ministers met, and the text could still change in the course of discussions on Tuesday evening.

Some ministers said before the talks that loans from EU emergency funds could only be granted to a government that signed a formal austerity program with conditions set and enforced by the European Commission and the IMF.

European Council President Herman Van Rompuy, who chairs EU summits, told a Brussels think-tank the future of the 27-nation union was at stake in the latest spasm of a debt crisis that began a year ago with Greece.

"We are in a survival crisis," he told the European Policy Center. "We all have to work together in order to survive with the euro zone because if we don't survive with the euro zone, we will not survive with the European Union."

But Rehn cautioned against alarmism, saying: "It's not a matter of the survival of the euro."

The European Central Bank and some euro zone peers want Dublin to take a quick decision on applying for aid amid signs that market contagion is spreading to fellow struggler Portugal and beginning to hurt Spain.

EU sources say possible aid under discussion for Ireland ranges from 45 billion to 90 billion euros ($63-123 billion), depending on whether Dublin needs support for its banks.

In Washington, U.S. Treasury Secretary Timothy Geithner said Europe was capable of dealing with the debt crisis but needed to act "very, very quickly," combining temporary financial support with reforms that resolve underlying problems.

His remarks appeared to reflect U.S. concern that, if left to fester, they could spread and imperil global recovery.

Failure to reach agreement at the talks, which widen to all EU finance ministers on Wednesday, could make markets even more jittery and push borrowing costs still higher for Ireland and other countries on the euro zone's periphery.

CONDITIONS

Eager to save face and protect a slim parliamentary majority, the Irish government has sought support for its banks, which were driven to the brink by the global financial crisis and a property market crash, without a formal state bailout.

In an indication of the sort of terms Brussels may face pressure to set, a senior German lawmaker said Ireland should raise its ultra-low 12.5 percent corporation tax rate, a magnet for foreign investment, to help cut its debt.

Higher-tax countries have long seen the Irish rate as a form of unfair competition.

Ireland's bond yields have soared in the past two weeks and its state-guaranteed banks are largely shut out of private sector interbank lending and reliant on the ECB for funds.

This has helped push up borrowing costs of other countries on the euro zone's periphery, such as Spain and Portugal. Spanish short-term debt financing costs jumped at an auction of 12- and 18-month treasury bills on Tuesday.

Spanish Treasury Secretary Carlos Ocana pressed Ireland to come to a resolution quickly to end market uncertainties. "The important thing is that Ireland makes a decision as soon as possible," he told reporters in Madrid.

ECB executive board member Juergen Stark said the central bank would press on with scaling back lending support to banks in the new year in a move bound to increase pressure on Irish and Portuguese banks.

The Irish coalition government has been reluctant to apply a politically embarrassing bailout, partly because it faces a by-election it can ill afford to lose on November 25 and also because it wants to preserve its sovereignty.

SPILLOVER

The risk premium investors charge for holding Irish 10-year bonds rather than benchmark German Bunds widened to 585 basis points and the cost of insuring Irish, Portuguese and Greek debt against default rose up as peripheral euro zone bonds remained under stress ahead of the Brussels meeting.

European Central Bank Vice-President Vitor Constancio said that if Ireland decided to request aid, which it had not yet done, it would not necessarily force other countries, such as his native Portugal, to follow suit.

The ministers were also expected to discuss a future euro zone crisis resolution mechanism, which Germany wants to start from 2013, replacing the 440-billion-euro European Financial Stability Facility set up after Greece sought help.

Ireland and Greece says Germany has aggravated problems by pushing the idea of asset value reductions or "haircuts" for private bondholders under the planned permanent rescue mechanism, raising the spectre of potential defaults.

(Additional reporting by Andreas Rinke in Berlin, Luke Baker in Brussels, Manuel Ruiz and Nigel Davies in Madrid, William James in London, Glenn Somerville and David Lawder in Washington; writing by Paul Taylor; editing by Mike Peacock)