Snap analysis: Ireland accepts banking advice, buys some time

Ireland resisted pressure to request direct financial aid from the European Union on Tuesday, but agreed to let EU, IMF and European Central Bank experts visit Ireland to look at how to deal with its banking problems.

The decision -- neither requesting a full bailout nor

rejecting outside help altogether -- could create more uncertainty on financial markets, where Irish sovereign bond yields have risen to record highs as the risk of an unsustainable debt spiral has grown.

But it could also allow Prime Minister Brian Cowen to focus attention on disarray in the banking sector, caused largely by the banks themselves, rather than on the huge deficit in public finances which is the responsibility of his government.

That may buy Cowen's government some time, or at least create a breathing space, before a by-election on November 25 which could reduce its parliamentary majority to just two seats. But it has not ruled out the possibility of a bailout later on.

Before euro zone ministers met in Brussels on Tuesday, Cowen repeated that Dublin did not need EU financial assistance because the government was well funded, with no need to return to markets to finance its debts until mid-2011.

But EU officials made clear that Ireland's bad banks problem was unsustainable and would require outside advice and assistance. On that score, Ireland appears to have conceded.

Mission to Visit Ireland

The EU commissioner for economic and monetary affairs, Olli Rehn, said a team of EU, IMF and ECB experts would visit Ireland to carry out a technical assessment -- a development not unlike the steps taken to help Greece earlier this year.

He said the team would focus on the need to restructure the banking sector, where the two largest banks, Allied Irish Banks and Bank of Ireland, are in a sorry state.

Both are heavily exposed to the country's wrecked property market and face the threat of not being able to roll over their debts, raising concerns about their liquidity and solvency.

The arrival of an outside team of experts could focus more attention on those problems and uncover more shortcomings, which could increase the downward pressure on the banks' share prices and their liquidity positions.

If that is the case, it could in turn increase pressure on the government, which may ultimately have no choice but to turn to the EU's financial stability funds for help.

Rehn indicated this eventuality was being prepared for, telling reporters the "intensification of talks" with Ireland could be regarded as preparation of a potential program of aid to Ireland, "should it be necessary."

He said it was too early to say when the intensified talks would be concluded but France's economy minister, Christine Lagarde, said the review of Ireland was more likely to take days than months.

In deciding not to seek direct help on Tuesday from the EU and IMF, which together have 750 billion euros ($1 trillion) of financial support mechanisms at their disposal, Ireland has signaled it hopes to resolve the worst of its budget deficit problems before mid-2011, when it will have to think about raising funds again.

In rejecting an EU sovereign bailout for now, but accepting it may need help with its banking system, Ireland may be hoping to decouple the issues, at least in the minds of voters.

By trying to create discrete problems and allowing the EU, IMF and ECB to help out on the bigger and more immediate of them -- the banks -- Cowen may be able to focus his political attentions more acutely on his pressing deficit issues.

But it would be a tall order for any politician to withstand the pressure for an EU bailout when other countries such as Portugal and Spain fear contagion, and at the same time keep voters happy before an election, resolve a banking crisis and convince financial markets that everything will be better soon.

[Source: By Luke Baker, Reuters, Brussels, 17Nov10]

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