“The creditors say please take the money, and the debtor says ‘we don’t want it’. It’s very odd..” says one observer of the Irish financial crisis. Dublin is resisting an ECB-inspired bailout because it fears the likely terms will damage their holy grail, the prospects for future growth, by imposing virtually insupportable terms like ending 12.5% company tax. On the other hand, you might think it’s just as peculiar for the ECB to insist on Ireland taking the money when they insist they can manage by themselves.
What the ECB and fellow EU members are demanding now is proof that the Irish really can manage. This is now more about the banks continuing to function more than sovereign debt. The press outside Dublin are taking broadly the same line, probably inspired by the ECB.
Market comment is clearly sceptical and other national central bankers are becoming rattled. To appease their critical audience the beleaguered Dublin government is bringing forward its four year budget plan to early next week. There had been an expectation the government would delay publication until after the Donegal South West by-election on November 25. And Brian Lenihan will surely outline it to EU finance ministers on night.
The problem for Biffo and co is that Irish banks are in hock to the ECB, the full extent of which is explained by Robert Peston, who is one of a number of financial journalists updated last night by the ECB on the extent of Ireland’s indebtedness to it. Will the ECB pull the plug?
From Peston’s picks
The latest published figures, which almost certainly understate the true picture, show that the European Central Bank had lent 83bn euros to Ireland’s domestic banks by the end of September and it had lent 130bn euros to all Irish credit institutions at the end of October.
Or to put it another way, ECB loans to Irish financial institutions were more-or-less equivalent to the current annual value of Ireland’s Gross National Product. To repeat, without the financial support of the ECB, Ireland would be bust right now.
…the moment is fast approaching when the ECB, if it behaves as many would say a central bank must behave to preserve the value of the currency, will announce that it is phasing out liquidity support for those weaker European banks – in Ireland, and Portugal and even Germany – which have become too dependent on it for loans.
But if the ECB were to be true to its central banking instincts and announced a timetable for removing the life-saving funding drip, what could be done to keep Ireland’s banks and economy alive?
The Irish government does not want a new formal bail out. But if there is the faintest sign that the ECB wants to withdraw the succour it has provided to weak eurozone banks, Ireland will no longer have a choice: it will have to go cap in hand either to its EU partners or to the IMF.
Dublin’s case was put to the FT by Prof John FitzGerald, professor at the Economic and Social Research Institute, who believes the economy is improving, pointing to a likely balance of payments surplus in 2011 and recent strong third-quarter industrial production figures.
“Given time, the economy could be got right, but the government doesn’t have time,” he said, describing a bail-out as increasingly likely.
Ireland has arguably taken every step to address its fiscal crisis, but it feels it is not just prey to the exigencies of the market but is a victim of a lack of solidarity from its European partners. “If our European colleagues want us to go down the bail-out route, it is important we are seen to benefit. You can’t resolve the euro crisis at Ireland’s expense,” said Prof FitzGerald.