Mid-November 2010 and rumour in Europe and internationally has it – rather strongly – that Ireland, financially stretched to breaking point, is negotiating the detail of an 80 billion euro loan from the EU’s European Financial Stability Fund.
Financial news service Bloomberg reported that “in a conference call of European Central Bank officials around noon Frankfurt time on Friday [12th November 2010], Ireland was pressed to seek outside help within days.”
Irish Taoiseach (Prime Minister) Brian Cowen flatly denied however that his government was looking for a bail out loan. “We have made no application whatever for funding” he claimed.
His Minister for Finance, Brian Lenihan, also denied applying for the loan, saying that Ireland “is well-funded into June of next year”.
The denials continued with the head of the Eurogroup of Finance Ministers, Jean-Claude Juncker, stating that Ireland had made no application a loan from the European Financial Stability Fund. And International Monetary Fund chief, Dominique Strauss-Kahn, added his view that “Ireland can manage well” and had no need to be bailed out out its financial crisis.
Officially, the Irish government was claiming that their budget for 2011, due to be announced on December 7th 2010, will calm the markets as it sets out plans to cut Ireland’s huge budget deficit by making 6 billion euros worth of spending cuts and tax increases.
Despite all the denials, however, pundits were saying that an EU bailout deal might be announced before Christmas 2010. A perfect seasonal gift for the Irish government.
Part of the complex and urgent financial problem for Cowen and Lenihan is the fact that Irish bond yields rose to a record 9% in November 2010. Since this means the interest paid to foreign investors reached an historic high point, the government consequently had hardly any possibility of borrowing to invest in the Irish economy.
BBC business correspondent, Joe Lynam, reported that:
“Dublin had hoped that by slashing spending and raising taxes in the forthcoming budget…it would show resolve and….drive down the cost of borrowing on the bond markets. That hope is now dashed.”
He also used Twitter to tweet: “…I’ve learned it’s not whether but WHEN Ireland formally approaches the European Financial Stability Fund (EFSF) for support. Ballpark loans worth €60-€80bn.”
EU officials had already scheduled a discussion of Ireland’s troubles in Brussels during the week 15-19 November. Their worry is that the Irish crisis could spread across the beleaguered eurozone to the weak and indebted economies of Portugal and Spain. Once again, as in the Greek crisis earlier in 2010, a weak national economy looks like spreading contagion to other eurozone countries.
If Ireland is forced to accept an EU bail out loan it will be as a last resort. Cowen and his government will not be looking forward to the inevitable loss of sovereignty that comes with an EU crisis loan. A European rescue deal would impose further spending cuts determined in part by the IMF.
Beyond Ireland’s economic woes, the EU talks have a wide European context to consider. Spain, Italy and Greece are all struggling with high debt, high public spending, low productivity and low profitability. Conditions are so bad in Portugal that the Portugese foreign minister said a lack of political consensus to deal with the national deficit and financial crisis may mean the country will be forced to abandon the euro as its currency.
Nevertheless, German Chancellor Angela Merkel, French President Nicolas Sarkozy and the other key power brokers in Europe remain anxious to try and hold the euro and the eurozone together.