Pressure is mounting on Ireland to accept a European bailout in order to restore confidence with investors in the solvency of other eurozone members deep in red ink. With its budget deficit expected to reach 30 percent this year, fear of a meltdown similar to Greece’s this spring is mounting.
When Greece was faced with bankruptcy last April, European leaders agreed to an unprecedented rescue effort to save not only Greece from sovereign default but safeguard the future of the euro itself. With a €750 billion stabilization package, the European Commission, individual member states as well as the International Monetary Fund sought to restore confidence in the common currency.
Ireland has so far refused aid from its European neighbors with Dublin insisting that it is not engaged in any bailout talks. The Irish government believes that it can present a credible austerity budget next month to satisfy investors. A rescue effort by contrast could diminish investors’ confidence in the state’s ability to repay its loans. The yield on Ireland’s benchmark ten year bond fell with more than a percent during the last week. A key index of Irish financial shares soared 5 percent on hopes of a bailout.
A crisis in Ireland could very well spill over to the continent where countries as Portugal and Spain remain mired in recession. Portuguese and Spanish bonds saw limited gains in recent days despite rumors of a bailout, reflecting the persistent uncertainty among investors in these economies.
While Ireland continues to refuse a bailout, it is enjoying support from the European Central Bank. Frankfurt is currently lending Irish banks €80 billion, equivalent to 40 percent of the country’s GDP. But the ECB can only do so much. It may intervene in markets to provide liquidity but cannot take credit risk. A bailout that exposes taxpayers to losses remains the purview of national governments.
Tapping into the €750 billion stabilization package is anything but an attractive option for Ireland however. Some Irish lawmakers have already lambasted the government for merely entertaining the notion of surrendering “independence” if it does for a bailout would probably be conditioned on severe austerity measures over which legislators have limited control as has been the case in Greece.
If Ireland fails however it could drag other eurozone members down with it. Portugal, though fiscally in more sound condition than Ireland, seems particularly fragile. Its economy is growing again at an annualized 1.2 percent in the third quarter but plans to rein in spending are limited. Rather the country largely relies on stronger growth in the near future to solve its budget woes.
The stabilization fund is large enough to cope with Ireland and Portugal on top of Greece but Europe cannot afford the contagion to spread further. Spain’s central bank president for one has urged Ireland to “make the right decision,” dreading that if it doesn’t, his own country could be next.