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.”
‘The Unthinkable Has Happened’
The business daily Handelsblatt writes:
“The fact that the euro zone still cannot calm the markets has partly to do with the its self-deception. Regardless of whether it is the governments, the European Central Bank or the European Commission, none have become honest yet about the way they have handled the crisis. They won’t admit that, firstly, the euro zone will not be able to master the crisis without a haircut: Greece, Portugal and now Ireland have to be given some debt relief. Loans from the European rescue fund will not replace this debt relief but only delay it. The countries that receive the loans from the euro zone and the IMF will have to pay them back. Greece cannot do that by any stretch of the imagination. Those who are making the decisions in the euro zone know this, they just don’t want to admit it.”
“Secondly, it is not just the Irish banks that are dramatically undercapitalized, but also the British and German banks. Things wouldn’t be going so bad for the government in Dublin today if they had allowed one or two bank insolvencies. However, bankrupt Irish banks would have dragged other financial institutions into the abyss with them. British, German and French banks would have had to face losses in the triple-billion figures in Ireland.”
“So Ireland had to safeguard its banks with state guarantees, with the active help of the ECB. In that way the Irish, British and German banks, and their shareholders, were able to pass off the debt problems onto the Irish state. But the taxpayers of this small country are hopelessly overwhelmed by this.”
“Ireland’s European partners have known about this, approved of it and perhaps even encouraged it. And the euro zone will soon be presented with the bill. Ireland will definitely need loans from the €750 billion rescue fund — regardless of whether it applies for help this week or later. That will only remove Ireland temporarily from the firing line of the markets. And the euro zone is still not saved. The markets could then fully concentrate on Portugal and Spain.”
“The shareholders in the banks will be pleased to be protected from the losses. But for the euro zone’s taxpayers this is all a catastrophe.”
The Financial Times Deutschland writes:
“The EU has once again sold a short-term PR offensive as a solution to a problem and has been caught out. The fact is that Greece, Ireland and probably Portugal are insolvent. And another fact is that the euro zone is strongly connected. German banks, insurance companies and funds are among Ireland’s biggest creditors. And if the German government is now pushing Ireland to apply to the rescue fund as soon as possible, then it is out of pure self interest. They want to protect German banks from losses.”
“And everyone, the Irish and the Germans, are pushing the bill onto the taxpayers. The markets recognize that the taxpayers are unable to cope with this bill and this has lead to rational corrections to the value of state bonds.”
“One should finally face the truth and confront the looming insolvency of Greece and Ireland. … Accepting reality means accepting insolvency and solving the problem. And there are, in principle, two choices: Either leaving the euro zone with a view to re-entering later or a managed insolvency. The later will be the preferred solution, politically and economically.”
The center-right Frankfurter Allgemeine Zeitung writes:
“If the euro fails, Europe fails, that was Chancellor Merkel’s depressing prediction and now Van Rompuy has echoed those sentiments: The EU is in a fight for survival due to the debt crisis of some euro states. … The euro, which was supposed to make European integration ‘irreversible’ could become its undertaker. … If the currency union were to fail, then the economic and political costs would be enormous. We should all be concerned about the historic consequences.”
The conservative Die Welt writes:
“The unthinkable has happened. The euro, the common currency and pride of the Europeans, is suspiciously close to the abyss.”
“Europe is in the deepest crisis since its foundation. The community began as a project for peace and reconciliation. Its credo was: The whole is more important than the individual country. Little remains of that sentiment. The EU of today is like a club of 27 egotists, that are somehow connected through technocratic procedures and the competition for the biggest slice of the European wealth cake. Europe is exhausted. It lacks strength, ideas, a common purpose and an indentity.”
“It could only come to this because the EU elites have failed for years and have not met their responsibilities. The debt mountains and the serious breaches of simple economic rules could only have occurred as a result of selfish calculation on the part of EU member state governments.”
“Now decisiveness, solidarity and political leadership are required. A politics of business as usual has slammed up against the wall. But will the politicians be able to change their spots?”
Originally published on Spiegel International: