Posted on Friday, November 19, 2010
BRUSSELS — An anxiously awaited meeting of European finance ministers ended Tuesday without an agreement to bail out Ireland's debt-stricken government, though both Irish and EU officials vowed to stabilize the banks at the center of the crisis and keep it from spreading to other fragile economies connected by the euro.
Ireland has taken over three banks and is expected to take over more in a bailout that has already reached euro45 billion ($61 billion) and likely will push the nation's 2010 deficit to a staggering 32 percent of GDP. The government in Dublin insists that it doesn't need a bailout from Europe, but growing doubts about Ireland's ability to pay its bills have sent interest rates soaring on Irish bonds.
Representatives of the European Union, the European Central Bank and the International Monetary Fund will travel to Ireland this week to determine what to do about the banks, Irish Finance Minister Brian Lenihan said.
"Ireland is now engaging in an intensive, and disclosed, engagement in relation to the problems in the banking sector," said Lenihan. "We will take whatever decisive measures that are required to stabilize our banking system as part of the stability of the wider eurozone."
EU monetary affairs chief Olli Rehn said Irish authorities "are committed to working" with the EU, ECB and IMF to "to determine the best way to provide any necessary support to address market risks, especially as regards the troubled banking sector."
"This can be regarded an intensification of preparations of a potential program in case it is requested and deemed necessary," Rehn said.
The IMF said late Tuesday that it would work with Irish and European officials to find "the best way to provide any necessary support to address market risks."
It remained to be seen whether Tuesday's statements would help calm bond market turmoil when trading resumes Wednesday.
Concerns that Ireland will be unable to pay the cost of rescuing its banks – which ran into trouble when the country's real estate boom collapsed – have worsened Europe's government debt crisis. Markets have pushed up borrowing costs for other vulnerable nations and threatened to destabilize the common euro currency.
The priority for European leaders is containing contagion – a market panic that jumps from one weak country to the next.
Behind Ireland stands Portugal, one of the eurozone's smaller members with 1.8 percent of its economy but one that is considered by some to have done less than the Irish to bring debt and deficits back under control. Next comes Spain, with a proportionally smaller debt burden but a dead-in-the-water economy that is so big – 11.7 percent of eurozone output – that it could present a much larger challenge if it needs help.
Stock prices fell worldwide and gold and other commodities plunged in value as investors awaited word from the talks in Brussels. The euro fell 0.7 percent against the dollar to $1.35.
The interest rate on Irish debt rose again Tuesday as hopes faded that the country would seek a bailout like the one that saved Greece from defaulting on its bonds in May. A euro750 billion ($1 trillion) backstop stands ready from other countries that use the euro.
Governments struggling with debt – built up during the recession and in some cases over years of living beyond their means – have slashed spending and raised taxes. But such austerity measures threaten to undermine desperately needed economic growth, in turn making it harder for nations to repay their debts.
The Irish government protests it doesn't need aid, at least not yet, because it has sufficient funds through mid-2011 and is planning euro6 billion ($8 billion) in 2011 cuts and tax hikes. However, it has suggested that direct EU aid to its cash-strapped banks would boost Ireland's creditworthiness, since the government has guaranteed the banks' financial obligations.
Ireland is making "significant efforts" to deal with its budget deficit, said Jean-Claude Juncker, who heads the group of 16 nations that use the euro.
"However market conditions have not normalized yet and pressure remains," Juncker said, adding that "we will take action as the eurogroup ... to safeguard the stability of the euro if that is needed."
An Irish bailout would mean humiliation for the government ahead of possible national elections early next year. Ireland would lose some control over its finances in return for loans, which could mean being forced to give up the country's rock-bottom corporate tax rate – a key attraction to businesses that annoys other EU countries that have much higher rates.
The low tax rate helped Ireland become one of Europe's fastest growing economies over the past decade, transforming it from a resident of Europe's poorhouse into a "Celtic tiger."
But when the boom collapsed in amid the financial crisis of 2008, Dublin was forced to rescue its banks, which had grown massively in recent years.
The government has taken over three banks – Anglo Irish, Irish Nationwide and the Educational Building Society – and has taken major stakes in Allied Irish Banks and Bank of Ireland. Allied Irish is expected to fall under majority state control within weeks.
The current panic over Ireland began in the wake of revelations that the cost of Ireland's bank bailout had risen sharply. The pressure worsened after Germany said bond holders should absorb part of the losses in any future bailouts. EU leaders slowed a bond sell-off with a statements that existing debt holdings wouldn't be affected, but couldn't restore calm.
Yields on 10-year Irish treasuries rose to 8.24 percent Tuesday from Monday's closing yield of 7.94 percent. Higher yields mean more investor doubts about whether they'll be paid back. They also make it more expensive to borrow and can make debts unsustainable as interest takes up a larger and large part of the budget.
Ireland says it has sufficient cash to fund government services through June 2011, and has postponed returning to the bond market until early 2011 in hopes that the interest rate demanded by investors will have fallen by then.
Should Ireland request aid after all, it wouldn't take long to raise the necessary money, said Klaus Regling, who runs the European Financial Stability Facility, the eurozone's portion of the euro750 billion financial backstop. It would issue bonds backed by eurozone governments.
"If one of our shareholders requests financial support, then the EFSF would be able to go to the markets very quickly," Regling said. After that, it would take five to eight working days to raise the money, he added.
When asked about reports that the U.K. – which is not part of the eurozone – might help Ireland with bilateral loans, French Finance Minister Christine Lagarde said that such support "is part of the options."
"If bilateral instruments are brought up, why not?," Lagarde said.GABRIELE STEINHAUSER | Huffington Post