Brian Cowen, Ireland’s prime minister, last night confirmed that Ireland had asked for a multibillion financial assistance package from the EU and the International Monetary Fund to stabilise the country’s economy and banking sector.

Cowen said: “The European authorities have agreed to our request. A formal process of negotiation will now commence with the European Commission and the International Monetary Fund in liaison with the European Central Bank. I expect that agreement to be finalised shortly.”

He said that international loans would support a restructuring of the banking sector, adding: “Irish banks will become significantly smaller than they were in the past so that they can gradually be brought to stand on their own two feet once more.”

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He added that there would be increased taxes and reduced spending to cut government borrowing by €15 billion over the next four years.

Cowen added: “A small, open economy like Ireland did not have the luxury of taking decisions without reference to the wider world.”

The assistance package will draw on funds provided by the IMF, the European Financial Stability Mechanism (EFSM) and the European Financial Stability Facility (EFSF).

The package is expected to amount to between €80bn and €90bn and will include bilateral contributions from the UK and Sweden. George Osborne, the UK’s finance minister, said today that the UK would offer a bilateral loan.

Markets rise

The news of the bail-out was greeted positively by the markets, with the euro up 0.3% in early trading.

In a statement issued last night, Dominique Strauss-Kahn, the managing director of the IMF, said: “An IMF team, currently in Ireland for technical talks, will now begin to hold swift discussions on an economic programme with the Irish authorities, the European Commission and the European Central Bank.”

EU finance ministers issued a statement after a conference call last night, in which they said that providing assistance to Ireland was “warranted to safeguard financial stability” in the EU and the eurozone.

The statement said that the programme would address the “fiscal challenges of the Irish economy in a decisive manner” and would build on the fiscal adjustment and structural reforms the Irish government is expected to present next week as part of its four-year budget plan.

The final agreement might not be concluded until the end of November.

Problems in Ireland have been exacerbated by huge withdrawals from banks, which have furthered weakened their capital reserves. The country’s largest bank, Allied Irish, revealed that it had seen €13bn in deposits taken off its books since the start of 2010. The Bank of Ireland lost €10bn in deposits in the third quarter of this year alone.

ECB support

The European Central Bank (ECB) issued a statement yesterday evening welcoming Ireland’s request for finance assistance. The bank said it shared the view of the Commission and finance ministers from the eurozone and EU member states that providing assistance to Ireland was “warranted to safeguard financial stability in the European Union and in the euro area”.

The ECB said that the financial support for Ireland would be provided under “strong policy conditioniality” on the basis of a programme negotiated with the Irish authorities by the Commission and the IMF in liaison with the ECB.

The statement said that the ECB was confident this programme would “contribute to ensuring the stability of the Irish banking system and permit it to perform its role in the functioning of the economy”.