After Greece and potentially Ireland, Portugal may be the next country using the euro to need assistance. Some analysts suggest the crisis is now less about about panic and more about a growing realization that debts may have grown too big to refinance, never mind pay back.
As an army of experts from the European Commission, European Central Bank and International Monetary Fund descended on Dublin to explore the scope and terms of a bailout, Irish Finance Minister Brian Lenihan insisted his government was still not certain it needed any emergency aid at all.
He told lawmakers that Ireland and the outside experts were exploring the prospect of forming “a contingency capital fund that would stand behind the banks,” but said no decision was imminent.
And underlining the government’s determination to negotiate a hard-fought deal, Deputy Prime Minister Mary Coughlan declared that Ireland’s 12.5 percent rate of corporate tax — a key magnet for foreign investment that Germany, France and other EU heavyweights want to see raised — “is non-negotiable.” Such inflexibility, while widely supported in Ireland, has been questioned elsewhere as unrealistic. The terms of any EU-IMF loan could come with specific requirements on restructuring Ireland’s tax system.
“When does denial turn into delusion?” Joan Burton, finance spokeswoman of the opposition Labour Party, said to Lenihan and Coughlan. She accused the government of lying to the public about the inevitability of a bailout.
All across the eurozone, analysts say, debt-burdened governments are living in denial about their long-term ability to keep drumming up fresh cash from bond markets and banks for refinancing debts.
Many say weak growth means Greece remains vulnerable to potential default, or a second rescue, when its current 110 billion euro EU-IMF loans come due for repayment in 2013.
Default — telling bondholders they won’t get all their money — solves the problem by reducing the amount of debt — but could result in market chaos, hit European banks holding Greek debt and leave Athens cut off from borrowing for an unknown period. European officials are discussing procedures to let a member of the eurozone default in a way that minimizes financial turmoil — a complex question that may not be solved for months or years.
Meanwhile, Portugal is reduced to hoping interest rates on its bonds will fall once the EU and IMF cap concerns about Ireland. Spain is struggling with less debt but a stalled economy with 19.9 percent unemployment.
The immediate focus is on Dublin because its banks have broken the patience of their major recent source for funding, the European Central Bank. The banks have already required a 45 billion euro ($62 billion) government bailout program that has pushed the Irish deficit this year to an unprecedented 32 percent of GDP.
In recent months loans from the Frankfurt bank to Irish banks have surged, and recently reached an apparent breaking point whereby the Irish banks could no longer provide sufficient collateral. The Irish Central Bank, controversially, has been filling the cash void by providing its own ECB-backed loans to the Dublin banks that have taken total ECB exposure in Ireland above 130 billion euro, a quarter of its eurozone loan book.
Irish Central Bank governor Patrick Honohan, forecast that Ireland would negotiate a loan facility with the EU and IMF worth “tens of billions.” He said the funds would be used to strengthen the financial foundation of Irish banking.
Three of Ireland’s six locally owned banks have been nationalized since 2009, while the government is the biggest shareholder in two others.
Honohan said the likely loan facility would provide a financial “buffer” for Irish banks that would be put on deposit, not spent.
