VIENNA // Vitor Constancio, the vice president of the European Central Bank (ECB), says Ireland will be able to tap into the EU's rescue fund to bail out its banks as pressure mounts to stop the Irish crisis infecting the rest of the region.
"The problems of the Irish banking sector are not only problems of liquidity but also in some cases problems of capital," Mr Constancio said yesterday.
"For that purpose, of course, the European financial stability facility would be adequate. According to the regulations of that facility, it cannot lend directly to banks. The facility lends to governments, but then the government, of course, may use the money for that purpose."
Irish bonds rose after the comments as European leaders pushed the government to accept a bailout and help it draw a line under its financial crisis.
While Ireland says it does not need to raise money until the middle of next year, its banks, weakened by a property market collapse, have grown increasingly reliant on the ECB for funding. The finance ministry says officials are in talks with the EU.
The premium investors demand to hold Irish 10-year bonds over the benchmark German bonds fell to 548 basis points yesterday compared with a record 652 last Thursday.
A request for aid by the Irish government may total about €80 billion (Dh$400.34bn) between next year and 2013, according to Barclays Capital.
Easing investor concerns about Irish finances would help to advance the German chancellor Angela Merkel's plan to require investors to help pay for future rescues, said a German government official.
EU leaders remain divided on Mrs Merkel's proposal, the timing of a bailout for Ireland and whether the ECB should keep buying bonds of debt-laden countries.
Miguel Angel Fernandez Ordonez, an ECB official, said yesterday that market conditions have been damaged by Ireland's refusal to make a "final decision" on how to fix its crisis.
Ireland's woes are the latest stage of a European sovereign debt crisis sparked by Greece last year. Mr Constancio also said Greece, bailed out by the EU and the IMF, may be forced to introduce additional measures to meet its budget targets for next year.
The EU's statistics office has revised Greece's budget shortfall last year to 15.4 per cent of GDP from 13.6 per cent, surpassing Ireland's 14.4 per cent shortfall.
The public debt of Greece stood at 126.8 per cent of GDP at the end of last year, higher than that of any other EU state. In April, Eurostat estimated the figure at 115.1 per cent of GDP.
The revisions are likely to mean Greece will not achieve its initial target of lowering the deficit to 8.1 per cent of GDP by the end of this year.
George Papandreou, the Greek prime minister, insisted last week that his government would still be able to reduce the deficit by at least 5.5 percentage points by the end of the year.
But in a weekend newspaper interview, Mr Papandreou conceded the deficit revision would add pressure on his government to cut costs, and said Greece could seek an extension for repaying its rescue loans.
The upward revision of debt and deficit levels was widely expected, as Eurostat said there were some issues with the Greek data when it released its previous estimates in April.
The statistics agency said yesterday that all the issues had been addressed and it no longer had any reservation over the Greek data.
The revised data came as Greece's finance minister met officials from the IMF, the European Commission and the ECB.
The three delegations, dubbed the "troika," were in Athens to review Greece's finances as part of regular checks of its implementation of the three-year €110bn loan agreement that rescued it from bankruptcy in May.
Greece has struggled to raise revenue, with figures showing it is lagging behind its targets, although it has generally performed better in spending cuts.
The government has imposed stringent austerity measures, including cutting civil servants' salaries, raising taxes and freezing pensions.
* With agencies