Ireland could use European Union aid to bail out cash-strapped banks, the European Central Bank said, stepping up pressure on the Irish government to give up its resistance to a rescue package designed to prevent the debt crisis from engulfing the euro economy.
As Ireland insisted it doesn't need handouts for its public budget, ECB Vice President Vitor Constancio said it would be able to use the emergency fund set up to support euro-area governments to recapitalize banks reeling from the bursting of the real estate bubble.
"The problems of the Irish banking sector are not only problems of liquidity but also in some cases problems of capital," Constancio said Monday in Vienna, Austria. Though the EU rescue fund cannot lend directly to banks, the Irish government can "use the money for that purpose," he said.
Irish bonds rallied as investors bet a bailout is imminent from the 750 billion euro ($1 trillion) fund created in May to stabilize the 16-nation euro economy. Germany is leading a drive to remedy Ireland's debt woes before other countries succumb to the speculation that claimed Greece as the first victim.
EU-Irish aid negotiations are running in parallel with discussions in Dublin over whether to pump more cash into banks to push their capital above regulatory targets, said a person with direct knowledge of the deliberations who declined to be identified because a decision hasn't yet been reached. A Finance Ministry spokesman declined to comment.
Expectations of a rescue as soon as Tuesday's meeting of euro-area finance ministers made Irish bonds Europe's best performers Monday.
Germany, Europe's largest economy, is pressing for a quick resolution to a crisis it helped exacerbate when Chancellor Angela Merkel on Oct. 29 won an EU pledge to consider her demand that bondholders share the costs of future EU bailouts.
Merkel's bid to penalize bondholders for betting against fiscally unsound governments prompted objections from ECB President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker, who will chair Tuesday's euro-area meeting in Brussels, Belgium.
Juncker said that he doesn't expect an agreement with Ireland at Tuesday's meeting.
Merkel steered clear of Ireland in a speech to members of her Christian Democratic Union party in Karlsruhe, Germany, Monday.
Spain's Miguel Angel Fernandez Ordonez, an ECB council member, blamed Ireland for equivocating over EU aid.
"The situation in the markets in recent weeks has been very negative due in some way to the lack of a final decision by Ireland," Ordonez told reporters in Madrid on Monday. "It's not me who should take a decision about Ireland, it's Ireland that should take the right decision at the right moment."
As ministers head to Brussels, the immediate focus is Ireland, with the country's top two banks — Bank of Ireland PLC and Allied Irish Banks PLC — growing increasingly reliant on the ECB for funding. ECB loans to Irish banks rose 7.3%, to 130 billion euros ($178 billion) in October from the previous month, Ireland's central bank said Nov. 1.
Though the government doesn't need to raise money to finance its operations until mid-2011, Finance Minister Brian Lenihan may use the meeting to seek aid for the banks, the Irish Independent newspaper said Monday, without citing anyone.