On Tuesday, embattled Irish Finance Minister Brian Lenihan fended off pressure from other euro-zone member states to seek a bailout package from the stability fund established by the European Union and the International Monetary Fund earlier this year. Yet Dublin may not be able to hold out for much longer.
The imminent arrival of IMF and EU experts in Dublin for what are being described as "short and focused discussions" starting on Thursday could see Ireland eventually tap into the fund, though on Tuesday night, following a meeting of euro-zone foreign ministers in Brussels, Lenihan was still insisting that such a bailout was "not inevitable."
Speaking to public broadcaster RTE on Wednesday morning, Lenihan said Ireland would accept EU support if the banking crisis was too big for the country to fix on its own. "Ireland is a small country and if the banking problems in the country are too big for this small country to manage, Europe is making it clear that they will help and help in every possible way to secure the system," Lenihan said.
Dublin's preferred option is to confine any rescue deal to help with the enormous costs of propping up the Irish banking sector, which has been practically demolished by huge losses incurred from the collapse of the real estate bubble. A wider bailout would be regarded as a humiliation for an already deeply unpopular government which, due to its wafer-thin majority, is unlikely to survive a full legislative period.
Not Just a Bank Bailout
Speaking to the Dáil, the Irish lower house of parliament, on Wednesday, Prime Minister Brian Cowen again denied that the government was in negotiations for a bailout. "What we want to concentrate on now is in a focused way, over the coming days, to sit down and see in what way can assistance be provided to ensure that these issues can be dealt with properly and appropriately in present circumstances."
However, euro-zone sources have told Reuters that once the joint mission completes its work there is an agreement in principle that aid would be triggered -- and that this would not just be for the banks. French Finance Minister Christine Lagarde has already said a decision would be taken in days not months and that help needed to be seen in a broad context. "We should not qualify this as a plan to help the banks," she said.
The fateful decision by Lenihan in 2008 to guarantee all deposits and debts in the Irish banking sector and the subsequent nationalization of three banks has already cost the state 45 billion ($ 61 billion) and pushed the nation's 2010 deficit to a staggering 32 percent of gross domestic product. The government has already slashed public spending and the country is braced for another tough budget on Dec. 7, when a further 6 billion in tax hikes and public spending cuts are to be announced. In addition, the government is to present a four-year budgetary plan next week to Brussels.
Yet the Irish commitment to tough austerity measures has not placated the markets, and concerns over the costs of rescuing the banks have pushed up the borrowing costs not just for Ireland but for other vulnerable nations such as Portugal and Spain, and threatens to destabilize the common currency. On Tuesday, European Council President Herman Van Rompuy even warned that the EU was in a "survival crisis" due to the difficulties facing the euro.
British Aid for Ireland?
Ireland's predicament is not only causing jitters within the euro zone. Closest neighbour Great Britain, which has resolutely stayed outside the currency union, is worried about the knock-on effect on its own economy if Ireland implodes. On Wednesday, British Finance Minister George Osborne declared that London was ready to help Ireland tackle its mounting debt problems.
"It's in Britain's national interest that the Irish economy is successful and that we have a stable banking system," he said ahead of a meeting of EU finance ministers. "So Britian stands ready to support Ireland in the steps it needs to take to bring about that stability."
What form that support might take is unclear, though the Financial Times on Wednesday reports that the United Kingdom is considering providing its own direct loans as part of the aid effort. "A move likely to be more palatable to his Conservative party's Euroskeptic members than joining in an EU package," the paper writes.
On Wednesday, European Economic Affairs Commissioner Olli Rhen confirmed that British help is being sought. "It is natural, because the United Kingdom and UK banks have a very significant exposure in Ireland. There is a very strong interconnection in the banking sector and the financial sector between the two countries."
In fact, British trade with Ireland is greater than its business with the huge BRIC emerging economies -- Brazil, Russia, India and China -- combined. Earlier this week, the Bank of England Governor Mervyn King emphasized the importance of the British exposure to the Irish economy, saying "it is relevant to concern about financial stability in the UK."
Of course, help may come with strings attached. Britain would like to see Ireland's low corporate tax rate of 12.5 percent raised to closer to its own. Indeed many other European member states have long grumbled that Ireland's low rate gave it an unfair competitive advantage. The new center-right coalition in London is reducing the British rate to 27 percent from next April and plans to reduce it even further in subsequent years.
Some of the German editorials on Wednesday take a close look at Ireland's financial woes while others look at how the debt crisis is undermining confidence in the entire currency union.
The center-left Süddeutsche Zeitung writes:
"Speculators like nothing more than when members of a currency union openly show discord -- that opens up chances to make a profit. In order to avoid a new escalation, the governments have to now appear united. EU President of the Council Herman Van Rompuy was right when he said Europe was going through a survival crisis, and that the euro weaknesses could spread to become the writing on the wall for the entire EU. A united front includes a commitment to solid economic activity, something that was not so customary in Greece up to now. And it includes giving the Irish money quickly if it is needed."
"But is there anything to the accusations that the German government is to blame for the latest escalation of the crisis? Because the chancellor wants to see investors as well as taxpayers financing the rescue of a euro state from 2013?"
"If Merkel were to abandon her plans, then it would be paradise for investors and unsolid governments. The speculators could charge high interests on Irish or Greek bonds without any risk of losses. ... And the Greeks could continue with their record indebtedness, because they would have no more pressure from the financial markets and in an emergency would be rescued by their euro partners. The euro zone would become a transfer union, to the detriment of the taxpayers, and the euro would soon fall apart."
"Merkel is therefore totally right. ... And the mistrust in Ireland's ailing banks has a much more detrimental effect on Ireland's credit worthiness than the German initiative to clean up the euro in the longterm."
"The Greeks and the Irish should stop bashing those who want to help them. ... Europe's politicians should make it clear that there is no alternative to hard austerity measures. And then they have to try to design Merkel's crisis mechanism so that is assures investors of two things: First that they bear long-term risks, just like in every other business. And secondly, that the euro states are prepared to contribute to any rescue plans. And it is clear that Germany would bear the greatest burden in that case."
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