DUBLIN—Ireland applied Sunday for a bailout worth tens of billions of euros from the European Union and the International Monetary Fund to prop up its ailing banks and public finances, bending to pressure from other European countries which fear Ireland's financial crisis could spread to other members of the euro currency area.
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Irish Finance Minister Brian Lenihan leaves a European finance ministers meeting in Brussels on Wednesday.
EU finance ministers "welcome" the application, they said in a statement late Sunday, and indicated they were prepared to endorse a package of loans from two European stability mechanisms, the International Monetary Fund, and possibly the U.K. and Sweden.
The rescue package would include money both to fill the Irish government's fiscal gap and to rescue Ireland's ailing banking sector. No figures were announced Sunday, but it is expected to be in the "high double-digit billions," according to a senior European official.
The size of the bailout is still being negotiated, along with the conditions that the EU and IMF would impose on Irish fiscal policy, European officials said Sunday. Analysts say Ireland may need at least €80 billion ($109.5 billion) to convince financial markets that it can stay solvent in the face of an outsized budget deficit and rising losses in its banking system.
Earlier Sunday, after a week of declining offers of a bailout, Irish Finance Minister Brian Lenihan said he would recommend his government formally apply for an aid package from the EU and the IMF to shore up its public finances.
Irish Finance Minister Brian Lenihan recommends that Ireland seek international bailout. Video courtesy of Reuters.
The finance minister said Ireland's banks have become "too big a problem for the country."
The government must now ensure that it is able to fund itself, that the economy remains stable and that Ireland can still borrow money in the financial markets, he added.
"So for all these reasons I will be recommending to the government that we should apply to a program and open formal negotiations," he said.
The step paves the way for the 16-country euro zone's second government bailout this year, following the emergency €110 billion ($150 billion) bailout plan for Greece in May.
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Ireland will have to knuckle down on public spending to meet EU guidelines, which many worry will trigger protests like the ones seen in Greece. The Irish Congress of Trade Unions already has planned a protest Nov. 27 against more government cuts.
Irish bond investors could become better protected against default risk. But market watchers worry whether the latest blow to the prestige of the euro will intensify scrutiny on the finances of other fiscally weak governments, such as in Portugal or Spain.
Mr. Lenihan said he made the decision after officials from the EU, the IMF and the European Central Bank concluded their examination of Ireland's banks and budget deficit.
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Mr. Lenihan said there is no firm figure on the aid package, adding that the amount will be decided in formal discussions. "Of course we are talking about tens of billions [of euros]," he said. He added that the amount "certainly will not be a three-figure sum" in billions.
Mr. Lenihan said the aid will be in the form of a "contingency fund" used to restore confidence in Ireland's banking sector and to send a message to the markets that Ireland has "firepower." He stressed the entire fund might not be drawn down.
Formal discussions on the aid package will "take weeks," he said. The interest rate applied to the aid is subject to negotiations.
A spokesman for the Irish Department of Finance said specific details about where the aid will come from haven't been finalized and aren't likely to be announced until after the formal application is made.
After Greece's bailout, the EU set up a general €440 billion government support package to prevent a future member government from defaulting on its debt.
U.K. Prime Minister David Cameron Thursday said that he isn't ruling out any options for offering possible financial support to Ireland, but didn't say how the U.K. might offer financial support.
Mr. Lenihan also emphasized in the interview Sunday that a rise in Ireland's corporate tax rate of 12.5% is "off the agenda."
Ireland's cabinet also was set to finalize details of its four-year budget plan on Sunday.
Irish Prime Minister Brian Cowen and his cabinet will discuss the plan that will detail how the government will make €15 billion of budget cuts over the next four years. The cuts are needed to reduce the country's budget deficit—forecast to reach 32% of gross domestic product by the end of the year—to the EU's target of 3% of GDP by 2014.
The plan is expected Tuesday.
EU and IMF officials in recent weeks have said they would be ready to act if Ireland decided it couldn't emerge from its crisis without help. Germany, in particular, had been urging that Ireland ask for help to prevent a contagion from spreading to other European government bond markets.
Ireland has pushed for the rescue to be billed not as a bailout but as a special facility to underpin the country's troubled banking system.
Allied Irish Banks PLC Friday confirmed the urgency of the banking situation, disclosing the government will have to provide more funds to fill holes created by growing losses on real-estate loans, following Ireland's crashing property market after a decade-long boom.
The government has been poised to own more than 90% of Allied Irish once it helps the bank raise more capital in coming months.
Ireland has said it will pump €50 billion into its banks, and is spending billions to buy bad assets. That rescue plan has inflated the Irish government's budget deficit.
The €50 billion of bank aid is believed to represent the minimum of an Irish aid package. Other estimates stretch to more than twice that level if the fiscal budget needs gaps filled.
Pressure for Ireland to seek help came from financial markets, where investors had been demanding higher premiums on Irish government debt to offset perceptions of rising risk of a sovereign default. Unless corrected, Ireland wouldn't be able to finance itself when it re-enters the capital market next year.
In addition to the volume and nature of the EU-IMF loan facility, financial markets are awaiting details, such as how the interest rate will be structured, to see how much of a break Ireland's treasury will get from the high yields demanded in markets last week.
—Ainsley Thomson and Jason Douglas contributed to this article.
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