Tags: EU | Europe | Financial | Crisis

EU Tries to Stop Spread of Panic Over Irish Debt

Tuesday, 16 November 2010 03:50 PM

European officials scrambled Tuesday to stop Ireland's debt crisis from turning into another Greek-style meltdown and dragging down the euro currency. Talks over solutions, including possible help for Ireland's troubled banking system, went into the night.

Only months after saving Greece, the 16-country eurozone has been shaken anew by 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 and their risky loans to developers stopped being repaid.

Ireland is on the hook for the bank losses — but wants nothing to do with the sort of European Union bailout that pulled Greece back from bankruptcy in May. That kind of intervention that could threaten the nation's status as a low-tax haven and humiliate the government ahead of possible national elections early next year.

Investors, meanwhile, are clamoring for a solution. Growing doubts about Ireland's ability to pay its bills have sent interest rates soaring on Irish bonds, making recovery even more difficult. European nations are worried — as they were with Greece — that Ireland's problems will make borrowing more expensive for economically vulnerable countries like Portugal and Spain and push them to the brink of default, threatening the stability of the euro.

The European Union's top monetary official, Olli Rehn, said the focus was on a bailout not of the Irish government but of Irish banks. He said the EU was working with the European Central Bank, the International Monetary Fund and national governments to find a solution.

"This is not a matter of the survival of the euro, this is a very serious problem in the banking sector of Ireland," Rehn said.

Jean-Claude Juncker, who heads the group of 16 nations use the euro, said that the 750 billion euro ($1.01 trillion) financial backstop eurozone governments set up together with the IMF last spring could be used to support the Irish banks.

Irish Prime Minister Brian Cowen said the government neither wants nor needs a bailout and reiterated that his government is fully funded through mid-2011.

He said before the Irish parliament in Dublin that Irish officials have been talking "with our European counterparts to see in what way market risks can be taken out of the equation." He declined to elaborate.

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, and yields on Irish bonds rose again as investors' expectations ebbed for an early decision on an Irish bailout — which would be expected to guarantee they will get paid back on their holdings.

The yield on 10-year Irish treasuries rose to 8.25 percent from Monday's closing yield of 7.94 percent. Yields rise as bond prices fall, and higher yields signify more investor perception of risk they won't get paid back.

Ireland has postponed returning to the bond market until early 2011 in hopes that the interest rate demanded by investors will have fallen by then.

Ireland's minister for European affairs, Dick Roche, suggested that others in the EU were panicking over how to manage Ireland's 45 billion euro ($61 billion) bank-bailout bill and its deficit, which is forecast to reach a staggering 32 percent of GDP this year, a record for postwar Europe.

"I would hope that after the meeting this afternoon and tomorrow there would be more logic introduced to this. There's no reason why we should trigger an IMF or an EU-type bailout," Roche said. "There is a problem with liquidity in banks, but I don't think the appropriate response to that would be for European finance ministers to panic."

A bailout of the Irish government would cause it to lose some control over its finances in return for loans. It could be 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 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.

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 statements that existing debt holdings wouldn't be affected, but couldn't restore calm.

Ireland's banks are in dire trouble due to reckless lending during an overinflated real estate bubble. The government has taken over three — 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.

Scott Brown, chief economist at Raymond James & Associates, said Ireland is more troublesome for Europe than Greece because more of Ireland's debt is held by major banks, especially in England. A default by Ireland could be another blow to banks that have only recently recovered from the global credit crisis.

David McWilliams, a former Irish Central Bank economist and prominent commentator, said Ireland's only card worth playing in this week's Brussels meetings was to admit defeat and stress that Ireland's problems were Europe's responsibility, thanks to the euro currency.

McWilliams said Ireland should agree to let the European Central Bank — which has full-time observers inside the Department of Finance in Dublin — take "direct responsibility for the Irish banks, over and above the Irish government."

That would keep the Irish banks from contaminating the bond market, easing the market turmoil for everyone.

"We need finally to be honest and say to our European colleagues that our banks are bust," he said. "No matter how much we bluff, that problem's not going to go away — and our problem is your problem. You have got to help us, because your problem could transfer from Ireland, Portugal and Greece to Spain and Italy. Although it's not pleasant, we've got to defend ourselves. We've got to say we're in this euro together, so what are you going to do for us?"

Even as the EU tried to find a solution to Ireland's problems, tensions over Greece's woes flared up again. Austrian Finance Minister Josef Proell said his country hasn't yet released its contribution to the next tranche of Greece's 110 billion euro ($148 billion) emergency loan because Greece hadn't fulfilled the requirements of the bailout agreement.

The EU statistics agency on Monday said Greece's 2009 budget deficit was much higher than previously expected. To receive the next portion of the loan, Athens has to cut its deficit by a certain amount every year.

"If they miss the targets we need to have a discussion," Proell said. "I'm prepared to pay out the tranche once the figures fit."

Greek Finance Minister George Papaconstantinou defended his country's performance. "Greece during 2010 performed the largest consolidation effort ever seen in the eurozone," he said. "We will fully respect our 2011 targets and intend to take all necessary measures."

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European officials scrambled Tuesday to stop Ireland's debt crisis from turning into another Greek-style meltdown and dragging down the euro currency. Talks over solutions, including possible help for Ireland's troubled banking system, went into the night.Only months after...
Tuesday, 16 November 2010 03:50 PM
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