Irish Bailout Hits Snags

By CHARLES FORELLE and DAVID ENRICH

BRUSSELS—Barely two months old, Ireland's €67.5 billion ($91.76 billion) deal for an international bailout is showing signs of strain, and the party expected to take power in this month's elections is maneuvering to renegotiate its terms.

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European Pressphoto Agency

Enda Kenny, leader of Ireland's Fine Gael party.

European finance ministers meeting in Brussels this coming week are expected to discuss how the plan could be modified amid Irish concern that it is too burdensome. Ireland has griped about the interest rate and the fact that taxpayers are bearing the brunt of the losses of the Irish banks.

At the same time, worries are rising that those banks could need more taxpayer-provided capital due to the threat of larger-than-anticipated losses, beyond the tens of billions of euros that already have been committed.

Those losses are on the minds of political leaders. Ireland's likely next prime minister, Fine Gael's Enda Kenny, said in an interview with The Wall Street Journal this past week that he is waiting for regulators to wrap up their "stress tests" of lenders next month "to see if there is another black hole in the banks."

On Wednesday, Ireland's departing finance minister postponed an injection of cash into the banks that was planned for the end of February, saying a new government should make the decision. Top opposition officials are far less keen to bolster banks.

While the next government appears eager to get a better bailout deal, talks with its primary funder, the European Union, will be delicate. Other EU countries, particularly France, are keen to extract a pound of flesh by eroding Ireland's low corporate-tax rate. The major Irish parties are united in their zeal to preserve it.

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A spokesman for the European Commission, the EU's executive arm, maintained that the deal wasn't up for negotiation. It was "decided with the state of Ireland," Amadeu Altafaj said Friday. "It's not, let's say, a program that has been agreed with a particular government and is subject to changes because of that."

Ireland's main leverage in the talks will be threatening to impose losses on holders of Irish banks' debt. At the insistence of the European Central Bank, which fears such "haircuts" would spook investors and worsen the euro zone's crisis, Ireland's government refrained from such a move last year.

But Fine Gael hopes to use the threat of a "haircut" to extract concessions from the EU and International Monetary Fund.

"The only card we have to play is the bondholders," a senior Fine Gael official said Friday. "If we can't get a better deal … we're going to be left with no options but to restructure the debt of the banks to protect the sovereign."

On Friday, Moody's Investors Service downgraded some of the debt of six Irish banks, saying the political statements "call into question the government's willingness to provide additional support to the banks."

The election is scheduled for Feb. 25, and the new government is expected to be installed by March 9, ahead of meetings of EU leaders on March 11 and March 24-25.

Any restructuring could be messy. Banks across Europe hold Irish bank debt, and the Irish Central Bank itself had, as of the end of January, about €50 billion of exposure though an emergency-lending facility outside the boundaries of normal European Central Bank funding.

A spokeswoman for the Irish Central Bank said the bank holds "suitable collateral" against its loans.

Further losses incurred by banks could derail the bailout plan. The bailout includes €10 billion specifically earmarked for banks, and up to an additional €25 billion that also could be used for them. Worries that that wouldn't be enough emerged Tuesday when Anglo Irish Bank Corp., the nationalized commercial-property lender at the center of the country's crisis, reported that it lost €17.6 billion last year.

Anglo Irish Bank's chairman, Alan Dukes, fanned the flames. Speaking that evening at a conference, Mr. Dukes predicted that Ireland's banks need "somewhere in the region of €50 billion of new capital" to absorb their losses. Officials from Ireland's two main political parties said Mr. Dukes was overestimating the carnage.

Mr. Dukes didn't respond to a request for comment.

Moreover, the plan provides just half of the €133.9 billion Ireland would need through 2013 to recapitalize banks, pay its bills and pay back its borrowings, including short-term debt, according to estimates released this past week by the European Commission.

Of the balance, €17.5 billion will be pulled from Ireland's own reserves, including the national pension fund, but that means €48.9 billion will need to be raised from capital markets and individual investors. For the latter, Ireland has created a "National Solidarity Bond," which can be bought at post offices. But it has issued neither treasury bills nor long-term debt on financial markets since September.

Write to Charles Forelle at charles.forelle@wsj.com and David Enrich at david.enrich@wsj.com