Finance Minister Brian Lenihan said in Dublin he would welcome the creation of “substantial contingency capital funding” for Irish banks, as they became “unmanageable for the state itself.” In Frankfurt, Trichet said in a speech that policies first used to fight the global credit crisis can’t “evolve into a dependency as conditions normalize.”

The ECB is concerned that banks in Ireland and Greece are becoming too reliant on its unlimited money market operations and is pushing Ireland to accept a rescue funded by European Union governments and the International Monetary Fund. Irish central bank Governor Patrick Honohan said today that an agreement may amount to “tens of billions” of euros.

Lenihan said Honohan “may well be right on that, but figures haven’t yet been discussed.”

“The big difficulty is that the banks grew to such a size that they became too unmanageable for the state itself,” Lenihan said on Irish broadcaster RTE. “That’s why we have to consider external assistance to stabilize the banking system.”

No ‘Shame’

EU, IMF and ECB officials today started to study the books of Irish banks battered by the country’s property slump. Investors dumped Irish bonds last week on concern about the nation’s ability to keep its financial system afloat, forcing Prime Minister Brian Cowen’s government to abandon its refusal to seek foreign aid.

“I certainly don’t feel a sense of shame about fighting hard for this country for the last two years to ensure its financial survival,” Lenihan said.

Irish bonds rose today, pushing the yield on the country’s 10-year debt down 2 basis points to 8.31 percent at the close in London. The premium investors charge to hold the bonds over benchmark German bunds fell to 541 basis points from 554 basis points yesterday. It touched a record 652 points on Nov. 11. Honohan said that Ireland would probably pay an interest rate close to 5 percent on any loans, similar to the rate offered to Greece when it requested a bailout in April. Lenihan said it would be “very desirable” to create a banking fund that didn’t have to be drawn down. An agreement has not yet been reached

“It will be a large loan because the purpose of the amount to be advanced, or to be made available, is to show Ireland has sufficient firepower to deal with any concerns of the market,” Honohan said. “We’re talking about a substantial loan.”

Balancing Act

Ireland’s woes, which follow the near-collapse of Greece’s finances earlier this year, contrast with the strength of economic growth in Germany. Europe’s largest economy expanded at the fastest pace since 1990 in the second quarter and business confidence rose to the highest since May 2007 last month.

That’s confronting the ECB with a balancing act as it tries to prevent Germany from overheating while propping up the financial systems of the euro region periphery.

“The ECB appears very uncomfortable with the role it has been forced to play in this ongoing drama,” said David Mackie, chief European economist at JPMorgan Chase & Co. in London, “A central bank’s lender of last resort role is not meant to fund fifteen-to-twenty percent of the banking sector’s balance sheet on an open-ended basis.”

Emergency Exit

Underscoring the ECB’s reluctance to be blown off course, Trichet emphasized the central bank’s willingness to withdraw emergency measures if needed next year. The ECB’s benchmark rate is currently at a record low of 1 percent.

“We consider that we are not bound to unwind non-standard measures before considering interest-rate increases; we could do one or the other or both,” he said.

Ireland’s banking crisis has added to the nation’s fiscal burden after the recession and a real-estate crash eroded tax revenue. Talks with the EU and the IMF may shift to the government’s finances after Monetary Affairs Commissioner Olli Rehn said on Nov. 16 that Ireland’s banking woes are “spilling over to the sovereign.” An EU official familiar with the talks said Nov. 16 that a package may clear the way for the government to stay out of the bond market for an extended period.

Fitch Review

Fitch Ratings said today it will review its grade for Ireland “in light of any package agreed with the IMF and EU.”

The review will include an assessment of “the likelihood that it would allow Irish banks and in particular the government to regain access to market funding at an affordable cost,” Fitch said in a statement. It lowered Ireland’s credit grade to A-plus from AA-negative on Oct. 6 and said the country was on a “negative outlook.”

Lenihan is due to publish details of a four-year, 15 billion-euro plan to lower the budget deficit this month and his 2011 budget on Dec. 7. Ireland’s government has said the final cost of its bank bailout may amount to 50 billion euros ($68 billion), about one third of gross domestic product.

Honohan said today it’s “true that the banks need additional confidence” even after the government pumped billions of euros into lenders including Allied Irish Banks PLC and Anglo Irish Bank Corp. “Our efforts, the huge sums put in by the government to support the banks, have not generated sufficient confidence yet” among investors, he said.

Allied Irish subordinated notes tumbled today on speculation any bailout by the EU and IMF will impose losses on bondholders.

The bank’s 12.5 percent subordinated bonds due 2019 were quoted at a bid price of about 45 percent of face value, according to Jefferies International in London, down from 100 percent in September. Credit-default swaps insuring 10 million euros of the debt cost 5.1 million euros in advance and 500,000 euros annually, according to CMA.