ANALYSIS:BRIAN LENIHAN was the last man into the crucible as euro zone finance ministers sat down last night to broker a resolution to the implosion of Ireland's banks. Fog at Brussels airport delayed him – and the Government's own position on the bailout seemed covered in a haze of fog-like ambiguity.
Amid a feverish atmosphere of expectation, however, it is clear that Lenihan and the Government are coming under massive pressure to accept emergency aid from the EU/IMF rescue fund.
There was no outward change in the Government’s official position that it does not need external help, but resistance at this point may be futile as contagion risk increases and the markets await a decisive response. This looks like the endgame.
Difficult talks lie ahead. It is already the case that an increase to Ireland’s cherished 12.5 per cent corporate tax rate would be in the frame in the event of a rescue. But other sacrifices may be sought too: public sector job cuts, pension cuts, property and water taxes.
Whether the Government is already at the point of bargaining on these issues is an open question, but the prospect of an intervention looms larger now than at any time before.
Facing Lenihan as he arrived last night in an expansive conference room on the fifth floor of the Justus Lipsius building were stone-faced fellows like Klaus Regling, head of the EU’s bailout fund, and European Central Bank chief Jean-Claude Trichet.
The portents were not good. Trichet’s lieutenants have been sounding ever-louder alarm bells about the increasing fragility of the banks. Even Olli Rehn, the unexcitable economics commissioner, spoke of Ireland’s problems being the “most pressing” in the euro zone as he confirmed IMF involvement in talks on a solution.
Events gathered sufficient pace yesterday for officials and diplomats to throw aside their reserve and speak freely of the clamour for an intervention.
Any rescue may not be immediate, but events are moving swiftly in that direction.
That decision is for the Government to make. However, numerous sources attest to the ECB’s anxiety about the banks and the sense that an attempt to trim €6 billion from the budget, on top of cumulative measures worth €15 billion since mid-2008, may prove impossible to execute in a scenario in which banks stand to receive at least €45 billion from the State.
With a majority of European governments said to be in the ECB camp as the meeting began, Lenihan’s room for manoeuvre is narrowing rapidly.
While sources briefed on the talks say the most straightforward way through the crux is to apply for help from Regling and the IMF, it is widely acknowledged that this is a humiliating course which risks collapsing the Government.
But the flameout of Ireland’s banks is no longer a local dilemma. This is a euro problem now, with consequent risks for other countries.
Even if aid is drawn down to prop up the banks, it seems inconceivable that to do so would avoid the intrusive conditionality built into the scheme.
A notional €20 billion for Ireland’s banks still amounts to a notional gain of €20 billion for the Irish public finances and that cannot be granted willy-nilly.
Still, a bailout was not the exclusive option on the table. An informed source said the possibility of urging bank bondholders to participate in recapitalisation at the risk of having their receivables cancelled altogether was also in the frame.
The glaring problem with that option is the very risk of euro zone contagion as investors take fright – and contagion is exactly what these talks are designed to avoid.
