DUBLIN // Global equity and currency markets were jittery yesterday as an EU-led crisis team headed for Ireland to push for a bailout that Dublin has desperately sought to avoid.
Officials from the European Commission, the European Central Bank and the International Monetary Fund were dispatched after an emergency meeting on Tuesday of EU finance ministers. They fear that the Republic of Ireland's sovereign debt crisis could spread to the rest of the euro zone.
After four days of sharp declines, stock markets recovered yesterday as expectation grew that Ireland would have to accept the EU rescue plan.
But the appearance of a crisis team in the Dublin finance ministry will deal a crushing blow to what little credibility the Irish prime minister, Brian Cowen, still enjoys after presiding over the implosion of one of the biggest financial bubbles in history.
Mr Cowen and his finance minister, Brian Lenihan, have repeatedly assured their citizens and the international community that Ireland would be able to fund a controversial bank guarantee that has already cost taxpayers €45 billion (Dh224bn), with further losses thought likely.
Yesterday Mr Cowen was still resisting talk of a "bailout", a term that he described in the Dail, the Irish parliament, as "pejorative". Mr Lenihan also avoided the term, saying that the IMF-EU mission was coming for a "short, focused consultation" about structural problems in the Irish banking system, and there was no deadline.
“Despite a large range of measures adopted by the government, 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,” he said.
Both in Brussels and in Dublin, however, it is now widely seen as inevitable that Ireland must accept a rescue package in the near future. Otherwise, it will face being shunned by global financiers when it next seeks to borrow money to fund a public deficit pushed to about 30 per cent of GDP – 10 times the EU limit – by the cost of the bank rescue.
“With all the pressure, it’s clear now that it’s just a matter of how much of a loan they are going to obtain and the terms and conditions,” said Constantin Gurdgiev, professor of finance at Trinity College, Dublin. “It’s not a matter of if, but of how much and when.”
Three years of Irish economic decline reached crisis point in recent weeks as bond markets, fearing a default, pushed the interest rates demanded for holding Irish sovereign bonds as high as 9 per cent – levels at which Dublin could not afford to borrow.
Yesterday morning, following news that EU ministers had failed to agree on a rescue package with Mr Lenihan in Brussels on Tuesday night, the yields on Irish bonds increased again to 8.25 per cent, having fallen earlier in the week on expectations that Dublin would accept a bailout. Portuguese, Spanish, Italian and Greek bond yields also increased, while in contrast, yields on equivalent German bonds dropped a little to 2.59 per cent.
The Dublin government has so far resisted the extreme pressure from Brussels to accept a deal, arguing that it is not affected by the current punitive interest rates because it temporarily withdrew from the bond markets in September, having fully funded its spending until the middle of next year.
But the indebted governments of Portugal and Spain – which unlike Dublin are still tapping the bond markets for cash – complain that the threat of Irish insolvency is driving up the interest rates they must pay.
Brussels and the IMF hope that by ending uncertainty over Ireland’s position they can forestall the need to rescue Portugal or – even worse – Spain, which accounts for almost 12 per cent of the Eurozone’s output. EU council president Herman Van Rompuy warned on Tuesday that such a chain reaction would threaten the survival not only of the single European country but also the European Union itself.
But many of Ireland’s 4.5 million people fear that, in return for a rescue, IMF and EU officials would impose cuts in services, welfare and spending even more draconian than the €15 billion in savings already signalled by Mr Lenihan for the next four years.
Ireland’s ruling classes are also outraged by what they see as the loss of sovereignty implicit in accepting the supervision of IMF and European officials. More specifically, they fear that Ireland will be forced to abandon its controversially low corporate tax rate of 12.5 per cent, which other European governments say has turned Dublin into a tax haven for their own corporations.
The United Kingdom – one of the countries to suffer most from Ireland’s low corporate tax rates – yesterday signaled that it too would be willing to contribute to a rescue, despite not belonging to the Euro zone. Its motives may not be entirely neighbourly.
An influx of foreign money stemming from the low corporate tax rate helped to fund the “Celtic Tiger” boom of the 1990s, combining with Ireland’s relatively cheap and well-educated English-speaking workforce to fuel world-record growth rates.
However, this genuine boom mutated into a massive property bubble. Subject to “light-touch” regulation by an earlier incarnation of the present administration, Irish banks borrowed heavily on the international bond markets, then lent the money to domestic property developers and commercial and residential buyers, driving property prices to several times their real long-term value.
Meanwhile, the government used the windfall revenue from property sales taxes, the consumer boom and a grossly over-expanded construction sector to pump up spending and inflate public pay, at the same time as it cut income taxes.
In September 2008, after the global economic downturn had burst Ireland’s bubble, the Irish banks persuaded Mr Cowen and Mr Lenihan to issue a blanket guarantee covering not only the banks’ deposits but also their debts – a potential liability to the Irish taxpayer of more than €400 billion.
As a result, the coalition led by Mr Cowen’s centre-right Fianna Fail party – the dominant force in Irish politics since 1932 – is now deeply unpopular. It currently enjoys a majority of only three in the Irish parliament, and is desperate to delay a general election that could eliminate the party as a political force.
Attacking Mr Cowen in the Dail yesterday, the opposition leader Enda Kenny said that his government had repeatedly claimed that previous rescue measures would work and no foreign help would be needed. Instead, he said, the IMF and EU were coming “and they’re not coming in here to say ‘well done Brians, well done lads, keep at it, you’re doing a great job”.