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WRAPUP 10-EU, IMF to lay groundwork for Irish rescue

Published 11/16/2010, 07:00 PM

* Ministers vow to protect euro zone's stability

* EU sources say aid could go beyond help for banks

* EU council president says euro zone in "survival crisis"

(Adds details, sources on possible aid, economist comment)

By Jan Strupczewski and Julien Toyer

BRUSSELS, Nov 16 (Reuters) - Euro zone finance ministers agreed on Tuesday to lay the groundwork for a bailout of Ireland with the IMF, but said Dublin must decide itself whether to request the aid.

The ministers said they had agreed the European Commission, European Central Bank and International Monetary Fund would this week start a mission to Ireland, whose debt crisis could threaten other euro zone states and the euro area's stability.

Before the ministers met in Brussels, Irish Prime Minister Brian Cowen resisted pressure to request a state bailout but indicated help may be needed for the banking sector, which is a big factor in the country's huge budget deficit.

Eurogroup chairman Jean-Claude Juncker, who chaired Tuesday's talks, vowed to defend the stability of the 16-nation currency zone.

"The discussions that will take place between Ireland and the Commission and the ECB and the IMF will enable us to have at our disposal all the elements and instruments we need were Ireland to make a request for assistance to the EU, the IMF and the Eurogroup," he told a news conference after the talks.

Euro zone sources said that although the mission would focus mainly on helping the banking sector, there was an agreement in principle to trigger aid for Ireland when the joint mission completes its consultations -- perhaps in days -- and that the aid would not be just a programme for the banks.

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"I don't have an exact calendar because there are works under way which are intensifying in a targeted and rapid way, to explore the whole variety of necessary measures," French Economy Minister Christine Lagarde said.

"If you ask me whether that is a question of six months or of days, I would say we are closer to a question of days rather than six months."

Concerns that Ireland's crisis could worsen and spread to other countries have unsettled financial markets, and any prolonged uncertainty could cause new jitters.

"There is an air of inevitability that there will be some sort of bailout," said Alan McQuaid, chief economist at Bloxham Stockbrokers. "Why come to Dublin if you are not going to give a bailout?"

He said bond markets might respond positively to the euro zone ministers' actions on Wednesday.

"But I am not convinced that even if we get a bailout the euro zone thing (problems) will finish there. The markets are smelling blood," he said. "There are a lot of guys in the U.S. who are worried that this is going to proceed into a full-blown bond market crisis, it's going to start off in Dublin and end up in Washington."

IRISH GOVERNMENT RESISTS PRESSURE

Cowen said in Dublin the Irish government was fully funded until mid-2011, and that only its banks may need help. He also acknowledged the government was no closer to publishing a four-year plan for tackling the budget deficit.

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Irish banks have grown increasingly reliant on funding from the European Central Bank, as other commercial lenders have been reluctant to lend to them following the financial crisis in fellow euro zone member Greece.

Bank of Ireland, the country's largest lender, signalled last week it had suffered a 10 billion euro outflow of deposits from early August until the end of September.

Allied Irish Banks, which will be more than 90 percent owned by the state following a rights issue later this year, will issue a trading statement later this week with details about its funding situation.

The euro fell more than a cent to below $1.3450 and European stocks shed 2.2 percent on the day as investors worried that the euro zone ministers' meeting would not bring a solution to Ireland's debt crunch.

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

European Council President Herman Van Rompuy said before Tuesday's talks 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, which secured an EU/IMF bailout.

"We are in a survival crisis," he said. "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."

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

The ECB is now channelling about a quarter of its loans to banks in Ireland. Ireland has said the bill for bailing out its lenders could top 50 billion euros, but investors fear the final figure could be worse. (Additional reporting by Reuters reporters in Madrid, London, Dublin and Washington; writing by Timothy Heritage and David Stamp, editing by Rex Merrifield)

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