International Monetary Fund chief Dominique Struass-Kahn has confirmed that it will contribute €22.5 billion to Ireland's bail-out, and said it was likely to be approved by the IMF board in December.
'The strategy for the financial system rests on twin pillars: deleveraging and reorganisation; and ample capitalisation,' he said in a statement. 'A fundamental downsizing and reorganisation to restore the viability of the system will commence immediately,' he added.
He was speaking after the EU approved an €85 billion financial package for Ireland and outlined a permanent system to resolve Europe's debt crisis, in which investors could share the cost of any future default.
Finance ministers from the euro zone, anxious to prevent market contagion engulfing Portugal and Spain, unanimously endorsed an emergency loan package for Ireland.
'Ministers concur with the Commission and the European Central Bank that providing a loan to Ireland is warranted to safeguard financial stability in the Euro area and in the European Union as a whole,' Jean-Claude Juncker, chairman of the euro area ministers, announced at a news conference.
Under pressure to take dramatic action to arrest a systemic threat to the euro before markets open in Asia on Monday, the 27 EU finance ministers approved the broad outlines of a permanent crisis-resolution mechanism, based on a joint proposal by Germany and France.
Crucially, private bondholders could be made to share the burden of any future sovereign debt restructuring of a euro zone country. But economic and monetary affairs commissioner Olli Rehn said this would be subject to a case-by-case evaluation without any automaticity.
International Monetary Fund procedures would apply, he said. The IMF's 'lending into arrears' policy stipulates that the Fund will lend to a country that is making good-faith efforts to come to an agreement with bondholders.
The IMF favours so-called Collective Action Clauses in sovereign bonds, enabling a majority of bondholders to impose restructuring on others. Rehn said CACs would apply on euro area sovereign bonds from 2013.
The heads of the European Commission, the European Central Bank, the council of EU leaders and euro zone finance ministers endorsed the Franco-German plan in a conference call.
The lack of detail in an earlier Franco-German deal on a permanent crisis mechanism, agreed last month, and talk of private investors having to take losses, or 'haircuts', on the value of sovereign bonds, helped push up borrowing costs for Ireland.
European leaders are hoping that the support package for Ireland, drawn from a €750 billion fund agreed by the EU in May this year, will convince markets that the crisis can be contained and spare Portugal and Spain.
'We have to make decisions which show that in the future, we are capable of resisting where there are shocks and turbulence,' Belgian finance minister Didier Reynders told reporters.
British Chancellor George Osborne said that although London is not a euro member, it would contribute to the Irish rescue to protect its own strong economic ties and stability.
Debt worries have driven the crisis for the past year, severely denting confidence in the 12-year-old euro currency and producing what amounts to a showdown between European politicians and financial markets.
Jitters sent the shares of European banks which hold the debt of Irish banks tumbling on Friday. The euro also fell to a two-month low against the dollar and the borrowing costs of Ireland, Portugal and Spain stood near record highs.
