Intervention inevitable as State faces pressure to agree aid deal

Despite its feeble position, the Government is determined not to go down without a fight, writes ARTHUR BEESLEYin Brussels

BRIAN LENIHAN came under intense pressure to accept an EU/IMF rescue plan when EU finance ministers gathered in Brussels two nights ago. He won some time, just, but momentum towards an external intervention now appears unstoppable.

Sources briefed about the discussions said the Irish situation took up less than an hour of the ministers’ time as “major member states” such as Germany and France rowed in behind the European Central Bank’s clamour for an immediate application for aid. Lenihan insisted he had no mandate to do that, but a swift agreement to intensify preparatory talks with the European Commission, the ECB and the IMF underscores the urgency of the situation.

The atmosphere remains highly volatile, with Dublin facing demands to decide on an aid package within days. The Government, though, in spite of its increasingly feeble position, seems determined not to go down without some semblance of a fight. Some officials are still insisting the end is not nigh, but the prospects of survival are marginal at best.

Few in the markets believe the Government. The latest moves in the drama provide more reasons to disbelieve it.

In the Dáil yesterday, however, the Taoiseach was still clinging to the line that there was no question of the Government being involved in bailout talks.

It was scarcely credible, but reflects the view that this is a negotiation now, with concessions to be won and important red lines to be protected. Whether this can yield any real dividends at this point remains to be seen. Viewed from Dublin, however, self-respect demands it.

There are degrees of humiliation for sure, but there’s no getting away from the damage to Ireland’s international standing. Diplomatic isolation is in store, unappealing loans from neighbours, the sinking sense that things are very bad indeed when the US treasury secretary reflects in public on your troubles.

As Cowen weathered on in the Dáil, British chancellor George Osborne was marching around Brussels declaring London’s willingness to step forward with aid for Ireland.

Osborne also revealed he has had “a number of discussions” with Lenihan, including a chat over lunch yesterday when non-EU ministers heard the latest from the battle to shore up Ireland. Lenihan left with a precursory couple of sentences to a throng of reporters. He wasn’t giving much away.

In the backdrop to all this lies escalating ECB concern about the mounting liquidity requirement for the banks. While the ECB wants to bring its emergency support programmes for banks to an end, its backing for Irish institutions only magnifies.

On its powerful governing council, sources say German Bundesbank chief Axel Weber ranks among the most anxious about Ireland. To lose the German in a scene like this is very serious indeed.

A further factor in the evaporation of confidence in the Government’s survival prospects is the creeping sense around Europe that it is a political impossibility to extract €6 billion from the budget – with another €9 billion to come over three years – while promising €45 billion to bombed out banks. This is seen as a recipe for turmoil, although no one says it in public.

Indeed, most of the public statements from European ministers are cast in supportive tones, with an emphasis on the fact that it is for the Government to make the decision.

However, Austrian minister Josef Proell went much further than that, speaking openly of a direct link between Irish woes and fears for the wider currency.

“Contagion risk is one of the dangers that is behind our pressure on Ireland to go under the umbrella. We, the countries of the euro zone, want to stabilise the euro and to avoid contagion risks. It’s one of the points that we said to our colleague – maybe it’s better to be one day before, than some days too late, under the umbrella,” said Proell.

So the talks are no longer secret. Right now the Government is campaigning to separate the bank problem from the sovereign debt crux allied to the hole in the public finances.

Yet this is a fiendishly difficult proposition, not least because the EU/IMF scheme cannot be deployed to directly aid banks.

To draw a line between the banks and the sovereign is to suggest that the State is not on the hook for the banks, which it unfortunately is. Banking consolidation is now likely, as is the possibility of a merger between AIB and Bank of Ireland. Old certainties fade away.

Olli Rehn, by now one of the best-known men in Ireland, pointedly said yesterday that the budget and the four-year plan were in the frame in the talks.

Having lost the fight to avert bailout talks, the Government is now fixed on the preservation of its €6 billion budget target, the €15 billion target for the four-year plan and the 12.5 per cent corporation tax rate.

As a wrenching denouement draws closer and closer, it’s little enough to go on.