Ireland nears aid deal, contagion fears persist

BRUSSELS/DUBLIN, (Reuters) – A financial aid plan to  help Ireland cope with its battered banks will be unveiled next  week, EU sources said on Friday, but experts warned a rescue may  not be enough to prevent contagion to other euro zone members.

Europe’s single currency fell back late in the day and the  risk premium investors demand to buy Irish debt instead of  benchmark German bonds remained high as optimism about an aid  deal was tempered by a sense the crisis is far from over.

A poll of participants at a high-level banking congress in  Frankfurt showed nearly three quarters believe the turmoil that  has shaken Europe’s currency bloc for much of the past year  would rage on even after an Irish rescue, ensnaring other  financially weak countries like Portugal.

“As long as the fundamentals don’t improve, the pressure  will continue on other countries too,” said Daniel Gros, head of  the Centre of European Policy Studies in Brussels. “Many believe  the euro zone is just moving from one crisis to the next.”

In Washington, U.S. Treasury Secretary Timothy Geithner  disagreed. Asked in an interview on Bloomberg Television whether  an aid package for Ireland from the EU and IMF could be the last  bailout needed, he said: “I think that is absolutely possible.”

“It is within the capacity of the Irish Government and the  European authorities to achieve, and I believe they will achieve  that because this government, Ireland, has demonstrated that  they are willing to do some very, very difficult, very, very  hard things to dig their way out of this mess,” he said.

Ireland’s central bank chief has acknowledged the country  needs a loan running into the tens of billions of euros to shore  up a fragile banking sector that has grown dependent on ECB  funds and seen an exodus of deposits over the past six months.

Allied Irish, once the country’s largest listed lender,  announced that customer accounts had plunged by 13 billion euros  so far this year and that mortgage book arrears had continued to  rise in the third quarter.

AIB is relying on the Irish government to bail it out after  years of loose lending to property developers left it with a  gaping capital hole in excess of 10 billion euros.

“General funding market conditions in recent months have  become increasingly challenging,” the bank said in a statement.
Last week, larger rival Bank of Ireland signalled a 10  billion euro outflow of corporate deposits in the third quarter  while bancassurer Irish Life & Permanent said it had suffered a  600 million outflow in the same period.

Unlike Bank of Ireland and Irish Life & Permanent, AIB did  not indicate if the deposit withdrawal had tailed off.