Ireland Still Needs a Safety Netthe Editors
Nov. 6 (Bloomberg) -- Six years after its banks collapsed under a ton of toxic mortgages, and three years after receiving a $93 billion international bailout, Ireland is about to make history: On Dec. 15, it will be the first euro-area country to emerge from its rescue program.
An inspection team from the European Union, the European Central Bank and the International Monetary Fund -- the so-called troika -- descended on Dublin on Oct. 29 for a 10-day negotiation over what comes next.
Ireland sees its exit from the bailout and the demanding conditions that went with it as restoring the country’s sovereignty. It’s impatient to break free. That’s why the government is hesitant to seek an emergency line of credit, which would again come with strings. This hesitation is understandable, but it’s a mistake nonetheless.
The Irish recovery is weak, and new setbacks are possible. A credit line, preferably one that would preserve Ireland’s eligibility for the European Central Bank’s bond-buying program, would help to calm investors’ nerves. The troika should urge Prime Minister Enda Kenny to accept a safety net -- and make it easy for him to do so. It shouldn’t demand more budget cuts or tax increases, which would stifle growth and inflame popular opposition. Unlike Greece, Ireland has met most of its reform commitments. It’s earned some leeway.
Ireland came close to bankruptcy after a property-market collapse caused its banks to implode in 2008. Instead of making creditors take losses and possibly setting off a Europe-wide chain reaction, Ireland assumed $80 billion of bank debt, and it soon needed a rescue of its own.
Two recessions later, the economy is much smaller -- but growing again, albeit at a glacial pace. Unemployment is still high at nearly 14 percent but inching down. The budget deficit is expected to narrow to 4.8 percent of gross domestic product next year, from 7.3 percent in 2013.
Earlier this year, Ireland tapped the capital markets for the first time in three years by selling $10 billion of long-term bonds -- a small yet symbolically important feat. Recently, the yield on 10-year Irish bonds has been just 1.78 percentage points higher than Germany’s. Ireland’s 10-year borrowing cost, now 3.46 percent, is down from 14 percent in 2011.
With renewed access to the capital market, why not go it alone? The frail expansion isn’t the only factor; the country remains heavily indebted as well. Ireland’s ratio of debt to GDP stands at 120 percent. Among the developed economies, only Greece, Italy, Japan and Portugal are deeper in debt, by IMF accounting.
Meanwhile, Ireland’s banks are still fragile. Nonperforming loans are on the rise. And the ECB is putting the five largest banks through stress tests. If they fail, the banks will need more capital, possibly from the European Stability Mechanism, the new bank bailout fund. Germany, however, is signaling it isn’t willing to let the ESM fund Ireland’s legacy bank debt.
Germany poses another problem: Before accepting Chancellor Angela Merkel’s invitation to form a governing coalition, the Social Democrats are demanding that she force Ireland to overhaul its corporate-tax system in return for the credit line.
There’s plenty here to make investors anxious. The need to fill a bank-capital hole quickly could trigger a bond-market panic. That could drive interest rates back up and Ireland back to the EU for another bailout. If the panic spreads, as it might, it would be a disaster for all of Europe, not just for Ireland.
A transitional credit line with few strings attached would lessen the danger. That doesn’t have to mean condition-free. Ireland, for example, could offer to negotiate over its status as a tax haven for multinational corporations, which irritates Germany and other EU countries to no end. The government already said on Oct. 15 that it would close the loophole that allowed Apple Inc. to transfer profits to an Irish unit but pay no income tax. It could offer more such reforms without raising the low corporate tax rate that brings in much-needed jobs.
In its own interests, the European Union should offer a post-bailout safety net on easy terms, and in Ireland’s interests, Dublin should go along.
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