Will Ireland accept a bailout and help reverse a bond sell-off among the eurozone's deficit-laden nations? The country is still refusing but so did Greece before it bowed to pressure.
Plenty of Irish voters aren't happy these days
Speculation is rife about Ireland's course of action, as the country's borrowing costs last week shot to record highs on concerns of a deficit set to hit 32 percent of gross domestic product this year.
Monday kicked off with a report in the Irish Independent newspaper claiming that at a meeting of eurozone finance ministers this week, Ireland plans to ask for money from the European Union's emergency fund to rescue its banks.
An Irish minister promptly fired off a denial about the country being in direct discussions about a bailout package from the European Union. While acknowledging that Ireland is in "continuous talks" with the EU about its growing debt, Dick Roche, Junior Minister for European Affairs, told Newstalk radio that it is "frankly wrong and grossly irresponsible that this story is being said and that a frenzy is being created out there."
The opposition claimed Europe had already started moves to rescue the country, but the Irish government denied it would need a bailout.
"Ireland has made no application for external support," a Finance Ministry spokesman said. "Ongoing contacts continue at official level with international colleagues in light of current market conditions."
The rumor mill is almost certain to continue with every new day of uncertainty confronting Irish banks. At the end of last month, they owed 130 billion euros ($177 billion) of outstanding European Central Bank loans, up from 119 billion euros a month earlier. Numbers being floated around as part of a bailout deal range between 50 and 77 billion euros.
Unemployment in Ireland has soared to 13.2 percent
The EU is reported to be keen for Ireland to accept aid to avert a Greek-style scenario in which budget problems in one country plunge the entire eurozone into crisis.
On Monday, European Central Bank council member Miguel Angel Fernandez Ordonez prodded Ireland to make a "final decision" on its fiscal crisis in a move to calm markets. "The situation in the markets in recent weeks has been very negative due in some way to the lack of a final decision by Ireland," he told reporters in Madrid. "It's not me who should take a decision about Ireland; it's Ireland that should take the right decision at the right moment."
But the clock is ticking. "I think Ireland can hold out another three to four months maximum, and it should, hoping that some positive surprise on growth might calm the markets," Unicredit Group chief economist Marco Annunziata told Deutsche Welle. "But investors will remain nervous until the question is settled of whether or not eurozone sovereign debts might be restructured."
Stability program on track
Another European expert, who asked not to be identified, said the European finance ministers could reach a decision as early as this week to funnel funds to Irish banks.
"These funds, which would help stabilize the banks, would be seen as a limited intervention," the expert said.
There is no question about Ireland's sovereign debt, the expert added: The Irish government has no immediate need for cash, being fully funded until mid-2011, and its stability program is on track
Irish banks owe billions to the European Central Bank
Germany has also pressed for Ireland to accept aid, insiders say. Allaying investor concerns about Irish finances would help advance Chancellor Angela Merkel's plan to require investors to help pay for future rescues. European leaders, however, remain divided on Merkel's proposal, as they do on whether the ECB should keep buying bonds of debt-laden countries.
Ireland's debt problems stem largely from the country's popped real estate bubble, when its local banks lent money too freely for construction projects. On top of that was the Irish government's decision to provide a blanket guarantee to all bank creditors.
As a result, the country has experienced the worst recession of any major economy. It has amassed debt of more than 100 billion euros and is struggling with an unemployment rate of 13.2 percent.
Tough fiscal conditions
A rescue plan would be deeply unpopular with Irish voters, who value national independence and the low-tax regime that lured in foreign investment from U.S. and other non-European companies, fueling high growth rates over the past 20 years. Indeed, an EU bailout, with tough fiscal conditions attached, would be humiliating for a country once celebrated for its rags-to-riches transformation.
Not unsurprisingly, critics of Ireland's action plan – or lack thereof – are wary of the country's every move. Karel Lannoo, chief executive officer of the Centre for European Policy Studies (CEPS) in Brussels, says the country should have acted long ago to steer clear of the financial challenges it now faces. "Ireland should never have given blanket coverage to banks in the first place," Lannoo told Deutsche Welle. "And it should have let some of the banks fail."
Lannoo now questions the repercussions for Europe. "How many more of these financial disasters can we have?" he asked.
Author: John Blau
Editor: Rob Turner