STABILITY FUND:IRELAND WILL be the first country to tap the EU bailout scheme set up in the wake of the Greek debt debacle. Any application for external aid will see the EU and IMF impose tough policies on the Government.
The €110 billion rescue of Greece was a chaotic affair, causing turmoil for months in the euro zone. By contrast, complex procedures laid down in the rescue net are designed to instil a level of certainty in the process.
Those systems will be tested the first time in the Irish rescue, meaning there is still a certain level of unpredictability. Although aid can be drawn down within days, the procedure is not automatic and it contains a number of hurdles.
Whenever it decides to trigger an aid application, the Government must first approach the Euro Group finance ministers. The group is on standby to receive such an application but it is unclear whether its president, Jean-Claude Juncker, would convene a teleconference to consider it or an emergency meeting in Brussels.
The ministers must decide by unanimity that an intervention is necessary, but their assent is presumed, given the pressure put on Minister for Finance Brian Lenihan when he met his counterparts on Tuesday night.
It is only after such a decision that the European Commission, the European Central Bank and the IMF would be formally charged with negotiating an aid programme with the Government.
Preparations for this step are well under way, however, with European and IMF officials poring over the public accounts in Dublin and the books of the banks.
They must decide how much aid is needed, for how long, at what price and under what conditions. They must also define specific economic targets to be realised as the rescue programme proceeds.
The conditions will be very tough, with an emphasis on budgetary discipline and strict compliance with policy guidelines laid down by the EU and IMF.
In all likelihood, any failure to realise targets would result in new conditions being imposed. Loans would be released in tranches over time, contingent on the achievement of targets.
The terms would be set out in memorandums of understanding (MoU) agreed with the commission and the IMF and signed by the Government.
Aid would come from three sources, and each has its own distinct approval process.
The first source is the commission, which has responsibility for the €60 billion European Financial Stability Mechanism (EFSM). Based on the MoU a qualified majority of all EU finance ministers must approve the release of money from this mechanism, which is funded directly from the EU community budget.
The second is the Luxembourg-based European Financial Stability Facility (EFSF), which can raise up to €440 billion on the markets with the benefit of guarantees from euro zone countries. This requires a unanimous vote of Euro Group ministers. Only then does the EFSF go to the markets. The fund is confident, however, that it can access money within five to eight days. Except in the case of Finland, the EFSF is structured so that separate national approval for aid is not required.
Although the EFSF has been operational since August - with guarantees in place for more than 90 per cent of funding - final approval for the participation of Belgium and Slovakia is awaited.
The third source of funding is the IMF, which has pledged up to €250 billion to the rescue net. Its management board must approve the release of funding.
EFSF How it works
How loan request is processed
1. Formal application for aid
2. European Commission negotiates stabilisation programme - including strong conditionality - in co-operation with the IMF and ECB
3. A memorandum of understanding is agreed between the EC, the IMF and beneficiary country and approved by the Euro Group and IMF board
4. After the EFSF finalises the term redemption, schedule and interest rate, it makes loan available to borrower on a defined date
. . . and how the money will be organised and released
1. Other member states act as guarantor
2. Bond investors provide money to EFSF at agreed interest rate. Principal plus interest must be repaid
3. EFSF loans to borrower at agreed interest rate. Principal plus interest plus margin charged on top of funding cost must be repaid
