EU finance ministers awaited the verdict of financial markets on Monday after unveiling a rescue package for Ireland and a long-term mechanism intended to prevent the debt crisis tearing the euro zone apart.
Under pressure to take action to arrest the threat to the currency before markets opened and prevent market contagion engulfing Portugal and Spain, they endorsed on Sunday an 85 billion-euro ($115 billion) loan package to help Dublin cover bad bank debts and bridge a huge budget deficit.
And they approved the outlines of a permanent crisis-resolution system called the European Stability Mechanism (ESM), based on a Franco-German proposal.
Crucially, the mechanism could make private bondholders share the burden of restructuring a euro zone country's sovereign debt bought after 2013, subject to a case-by-case evaluation, EU Monetary Affairs Commissioner Olli Rehn said.
The lack of detail in an earlier Franco-German deal on a crisis mechanism, agreed last month, and talk of private investors having to take losses, or "haircuts", on the value of sovereign bonds, helped drive Ireland over the cliff.
With anxiety rattling bond markets, the Irish government had been under intense pressure to accept a bailout despite repeatedly saying in recent weeks it did not need one.
"This agreement is necessary for our country and our people. The final agreed program represents the best available deal for Ireland," Irish Prime Minister Brian Cowen said.
The euro [EUR=X 1.3209 -0.0074 (-0.56%)] rose slightly against the dollar in early Asian trading on Monday.
But initial reactions from market analysts to the EU moves ranged from skeptical to bleak. "I don't think this is going to be a silver bullet. I think there are still going to be some question marks on Portugal and Spain," said Peter Westaway, chief economist at brokers Nomura.
"I think it is almost impossible now to stop the contagion," said Mark Grant, managing director of corporate syndicate and structured debt products at Southwest Securities in Florida.
"Bond owners will turn their attention to Portugal, Spain, Italy, Belgium et al as the monetary union is full of structural defects. With the possible exception of Germany, it appears to me that no sovereign debt is safe."
IMF Rules
International Monetary Fund procedures would apply in the ESM, Rehn said. The IMF's "lending into arrears" policy stipulates that the Fund will lend to a country that is making good-faith efforts to come to an agreement with bondholders.
European Central Bank President Jean-Claude Trichet said in Brussels the important points were that the IMF's doctrine would apply, the EU would not get involved in debt restructuring itself and bondholders would not be affected retroactively.
Jitters sent the shares of European banks which hold the debt of Irish banks tumbling on Friday. The euro also fell to a two-month low against the dollar and the borrowing costs of Ireland, Portugal and Spain stood near record highs.
European officials have been at pains to play down the links between Ireland and Portugal, widely seen as the next euro zone "domino" at risk. Troubles in Portugal could spread quickly to Spain because of their close economic ties.
Debt worries have driven the crisis for the past year, severely denting confidence in the 12-year-old euro currency and producing what amounts to a showdown between European politicians and financial markets.
Irish Banks
Some 35 billion euros was earmarked to help restructure the shattered Irish banks, of which 10 billion will be an immediate capital injection and the rest a contingency fund. Ireland will contribute 17.5 billion euros of its own cash and pension reserves towards the bank rescue.
The rest of the emergency loans, which Dublin said were granted at an average interest rate of 5.8 percent, will help cover the giant hole the banks have blown in public finances.
The IMF will contribute 22.5 billion euros.
Rehn said the final interest rate would only be decided next week but put the likely average at about 6 percent.
In a key concession, Ireland was given an extra year, until 2015, to bring its budget deficit down to the EU limit of 3 percent of gross domestic product. And Cowen, whose unpopular government is close to collapse over the EU/IMF bailout, said the deal did not involve any change to Ireland's jealously-guarded 12.5 percent corporate tax rate.
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