The Irish government has finally swallowed its pride and confirmed that it is requesting as much as €90 billion from international institutions to rescue its winged economy and stricken banks.
After weeks of increasingly worrying financial instability and days of putting off the inevitable, a request for financial assistance has now been made formally to the International Monetary Fund (IMF), the European Union and the European Central Bank (ECB)
European stockmarkets and the euro responded favourably to the bail out, rising in early trading in Monday.
The size of the rescue fund has yet to be announced but is expected to be below the €100 billion given to Greece last May.
"The European authorities have agreed to our request," Irish prime minister Brian Cowen said. "I expect that agreement to be finalised shortly, within the next few weeks."
The decision came just as Ireland was facing growing panic from investors and savers and anger from other European governments.
Despite a blanket guarantee on deposits, by the weekend, Irish banks were seeing large sums withdrawn by anxious savers and businesses and it is thought that the threat of a Northern Rock-style bank run spurred Cowen into action.
Once known as the Celtic Tiger, Ireland’s economy went from boom to bust in seven years. IMF figures show its GDP growth was 9.7% in 2000 but halved the following year and remained steady until the recession in 2008 when it dropped to -3.6%. It plunged to -7.6% last year.
International finance ministers and EU policymakers had feared that Ireland's problems might spread to other eurozone members facing large budget deficits and countries such as Spain and Portugal could face systemic crisis. Portugal has already warned that there is a “high risk” it might need economic help.
EU Economic and Monetary Affairs Commissioner Olli Rehn said the European Commission, European Central Bank and IMF would prepare a three-year package of loans for Ireland by the end of the month.
"Providing assistance to Ireland is warranted to safeguard the financial stability in Europe," Rehn told Reuters."The programme under preparation will address both the fiscal challenges of the Irish economy and the potential future capital needs of the banking sector in a decisive manner,” he said.
The US Treasury welcomed Ireland's move and said it would "continue working closely with our European counterparts and the IMF to strengthen market stability and the global recovery".
Despite not being part of the eurozone and having no obligation to contribute, Britain has pledged £7 billion in bilateral aid because Ireland is a key trade partner.
George Osborne defended the package, describing Ireland as a "friend in need," and adding: "I judged it to be in our national interest to be part of the efforts to help the Irish."
But Euro-sceptic John Redwood said the bail out was “not Britain’s problem,” adding: “Ireland is part of the euro because it wanted to be and it’s the European Central Bank that is the lead bank and, with the European regulator, the lead authority over the Irish banks, so it’s their duty to make sure that their banks are solvent and liquid.” Why should Britain have to do it when we’re not part of the euro area?”
This criticism was echoed by the Adam Smith Institute which dubbed the aid as ‘a bad deal for the UK’.
Sam Bowman, head of research at the think tank, said: "The UK successfully avoided entering the eurozone. Ireland was not so lucky, but it entered in full knowledge of the risks involved. Bailing out Ireland now would undo much of the benefits that Britain has yielded from keeping the pound and would make a mockery of the spending cuts announced by the coalition last month.”
Sweden has also offered a direct loan.
Even with a cash injection the future for Ireland looks austere. Speculation remains over a reduction of the minimum wage alongside cuts in welfare benefits. Tax breaks for higher earners may also go and a new property tax is expected. Unions have warned that further austerity measures could spark unrest in Ireland.