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Eurozone facing "survival crisis"

BBC

Fears have grown that pressure will spread to other weaker eurozone countries
The European Union is in a "survival crisis" over the eurozone's debt problems, the EU president has warned.

Speaking hours before eurozone ministers meet to address threats to the bloc's economic stability, Herman Van Rompuy said that if the euro failed, so too would the EU.

Members such as the Republic of Ireland and Portugal are under fresh scrutiny.

Questions have been raised over whether they can manage their debt without help from EU funds.

Mr Van Rompuy said he was "very confident" the problems could be overcome.

But he added: "We all have to work together in order to survive with the eurozone, because if we don't survive with the eurozone we will not survive with the European Union."

Bond auction

The Irish Republic has insisted it does not need EU help.

But there is intense speculation that both it and Portugal may be forced to use EU bail-out money.

Portugal's finance minister has said that investors believed that his country would be forced to seek emergency help, because of the worries spreading in the markets.

Fernando Teixeira dos Santos urged Dublin to do the right thing for the euro and accept a bail-out.

And the Spanish treasury secretary called on the Republic to act quickly to end market uncertainties.

On Tuesday, Spain held an auction of government bonds - a routine way for governments to raise funds.

However as Irish bail-out concerns hit other eurozone periphery countries, the rates it must pay on money borrowed - the bond yield - was higher than that faced earlier in the year.


Solidarity sought

The BBC's business editor Robert Peston said that much hinged on the stance of the European Central Bank (ECB) - which has propped up the Irish Republic's banking system with loans it could not get on the money markets.

"Without the financial support of the ECB, Ireland would be bust right now," he said.

"But if there is the faintest sign that the ECB wants to withdraw the succour it has provided to weak eurozone banks, Ireland will no longer have a choice, it will have to go cap in hand either to its EU partners or to the IMF."

The Irish Republic's Europe Minister, Dick Roche, admitted that there were major liquidity problems at the country's banks.

However, he said that his government had made major spending cuts which would be continued in its upcoming budget, and added that he hoped there would be "solidarity" from European colleagues at the Brussels meeting.

"I would hope after the meeting there would be more logic introduced into this," he told the BBC.

"There is no reason why we should trigger an IMF or an EU-type bail-out. There is a problem with liquidity in banks, there is no doubt about that. But I don't think that the appropriate response to that would be for the European finance ministers to panic."

There are a range of funds which troubled nations could access - including the European Financial stability facility - 440bn-euro (£372bn) pot of money set up to aid eurozone countries that run into debt difficulties.

And while the UK is not part of the EU, its taxpayers could end up footing some of the bill for any bail-outs.

For example, there is the European Financial Stability Mechanism - a 60bn-euro, EU-wide scheme, which countries can draw on and to which the UK contributes 12%.

Also, if the International Monetary Fund (IMF) is asked to step in, the UK would fund 4.5% of any aid.

Budget brought forward?

The Republic of Ireland government has consistently stated its determination to restore stability to the public finances and stressed that it is "fully funded" until late 2011.

The banks have struggled since 2008, when the Irish Republic suffered a dramatic collapse of its property market.

House values have fallen between 50% and 60% and bad debts - mainly in the form of loans to developers - have built up in the country's main banks, bringing them to the verge of collapse.

Reports suggest the Republic will try to reassure markets by bringing forward details of its four-year financial plan to next week.

The proposals will be severe. It has said it will impose unprecedented spending cuts or tax rises totalling 6bn euros (£5bn) to try to bring its underlying budget deficit down from about 12% to between 9.5 and 9.75% next year.

While intended to boost confidence in the country's finances, investors fear the budget cuts could plunge the Republic back into recession, leading to further losses to the government via falling tax revenues and higher benefit payments.

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