By DAVID ENRICH And CHARLES FORELLE

By DAVID ENRICH And CHARLES FORELLE

DUBLIN—The Irish government all but buckled to pressure to accept a historic international bailout Thursday, capitulating after a week of intense lobbying from officials across Europe and spurring questions about which other European economies will need a helping hand. Ireland's central-bank governor and finance minister acknowledged for the first time Thursday that the country needs help rescuing its banking industry, which has been crippled by losses on sour loans.

The Irish government is in talks with the International Monetary Fund and European officials about a loan package that is likely to amount to "tens of billions" of euros, the central-bank governor, Patrick Honohan, said. "It will be a large loan because the purpose...is to show Ireland has sufficient firepower to deal with any concerns of the market."

Ireland's grudging decision to accept foreign aid, after insisting it didn't need help, is a bitter moment for a country that won its independence from Britain decades ago. Already, some lawmakers and editorial writers are bemoaning what they see as the inevitable loss of sovereignty that will accompany a foreign bailout.

It is an equally pivotal point for the 16 nations that use Europe's common currency. After rescuing Greece in the spring, European leaders are now betting that if they extinguish the financial crisis engulfing Ireland, it won't spread to other euro-zone weak spots. But with bond markets continuing to punish those countries, new bailouts may be needed soon—a prospect that some believe will call into question the durability of the euro as a common currency.

The near-certain bailout helped ignite a global markets rally in which the euro rebounded against the dollar and equity markets strengthened.

As Ireland copes with the aftermath of a large property bust, it faces a new wave of emigration but also innovation, as a group of architects band together to create a micro economy. WSJ's Andy Jordan reports from Dublin.

It has become almost impossible for Ireland's banks or government to drum up funding through traditional market sources. That has prompted them to lean heavily for financing on the European Central Bank, which has grown wary of its growing exposure to Ireland.

The structure of an anticipated bailout remains unclear. Mr. Lenihan told lawmakers Thursday afternoon that the negotiations will be focused on "providing capital—or a contingency capital fund—that can stand behind the banks."

A crucial issue is the fate of Ireland's ultra-low 12.5% corporate tax rate. Some European leaders want Ireland to increase that tax as a condition of the country's receiving funds, but Mr. Lenihan and other Irish ministers have ruled that off-limits. For some time, many EU nations have chafed at Ireland's use of low corporate taxes to woo business. Excluding exemptions, the average corporate tax rate in the EU is 23%; the U.S.'s corporate rate is 35%.

The Irish capitulation underscores the hazards of placing separate countries under a single monetary regime.


The ECB's low-interest policy exacerbated Ireland's bubble during the boom decade. Today, the central bank's anti-inflation bent accelerated Ireland's demise: According to several people familiar with the matter, it was the ECB—nervous to be lending so heavily to troubled Irish banks—that led the charge to push Ireland to find liquidity elsewhere.

The €750 billion bailout fund from which Ireland likely will draw was established just this spring, and European officials hoped never to use it. It was meant to reassure financial markets that they need not fear lending to a euro-zone country, because its fellows stood behind it.

This week, a team of officials from the IMF, the ECB and the European Commission arrived in Dublin to assess the scale of the problem and gauge how much assistance Ireland is likely to require.

Until Thursday, Irish government officials had rejected any suggestion that a bailout was necessary. But that position is wilting as leaders gently prepare the public for the idea of a politically unpopular bailout.

"It's clear we will need some form of external assistance," Finance Minister Brian Lenihan said Thursday evening in a national television broadcast. "We have to find a resolution to our banking difficulties with whatever external assistance is appropriate."

Anxiety about Ireland has rubbed off on other financially shaky euro-zone countries. On Wednesday, Portugal shelled out a lofty interest rate to attract investors in a routine auction of government debt. On Thursday, a Spanish auction fared better, but the country still had to offer a yield that was about half a percentage point higher than when it last issued debt two months ago.

Jean-Claude Trichet, president of the European Central Bank, also sounded an alarm Thursday, saying he had "grave concerns" about how much was being done to toughen the EU's fiscal-discipline rules, which were widely ignored for most of the past decade.

Trying to quell public furor over how much the Irish government has already spent in vain on bank-rescue efforts, Mr. Lenihan said an international bailout "would not necessarily" create additional burdens on the taxpayer beyond fees for the borrowing.

Still, borrowing tens of billions of euros a year could add billions in extra interest payments for the Irish government.

Any loans also could come with conditions attached by the IMF, , which has dispatched a team of about a dozen economists to Ireland, and expects to start working on Friday.

A hint of possible Fund demands are contained in its review of Ireland's economy. In that report, published in June, the IMF said that the Irish needed to boost financial regulation to guard against risky loans to small and medium-size companies, which the Irish government was pushing.

The IMF also called for broad financial restructuring including the sale of bank assets—quickly. "Rather than aiming to time the market for an upturn in property prices, the goal should be to reduce the large overhang of property in state hands (which could keep investors on the sidelines and prices low), restart market transactions and, thus, help normalize the property market," the IMF report said. At the same time, the IMF called for "targeted support" for homeowners who might be forced to default on their mortgages.

The public statements by Messrs. Honohan and Lenihan represent the government's clearest acknowledgments yet that Ireland's repeated attempts to stabilize the banking system have failed. Most recently, the government in late September said it would inject billions of euros more into the banks, pushing the total investment to about €50 billion ($67.52 billion). At the time, Mr. Lenihan vowed that the banks wouldn't need more.

.."It's true that the banks need additional confidence," Mr. Honohan said Thursday. "The huge sums of money that have been put in by the government to support the banks have not generated sufficient confidence yet."

One source of market angst is Allied Irish Banks PLC, the country's second-largest bank and a major player in its property-lending binge. So far, Allied Irish has posted smaller losses than some rivals, but some industry officials worry it could be plagued by a new wave of bad loans.

Despite the pressure of financial markets, the Irish government isn't likely to take a bailout lightly. Ireland's independence from Britain, long fought and hard won, still resonates vibrantly in the public sphere.

"Was it for this?" the Irish Times editorialized Thursday, lamenting that the martyrs of the 1916 Easter Rising should have died for such a humbling: "a bailout from the German chancellor with a few shillings of sympathy from the British chancellor on the side."

It went on: "There is the shame of it all. Having obtained our political independence from Britain to be the masters of our own affairs, we have now surrendered our sovereignty to the European Commission, the European Central Bank, and the International Monetary Fund." In Ireland's parliament, a deputy recited the stanza of Yeats from which the editorial takes its title, an elegy for the dead of an earlier, failed, revolution.

In Dublin, a small band of protesters demonstrated outside the Finance Department building where IMF and European officials were gathered. Nearby, at the Central Bank's nearby headquarters, a lone woman carried a home-made yellow sign that read: "Ireland's new absentee landlords—ECB and IMF. Famine next!!!"