Ireland's dependence on Europe has become a one-way street

 

EUROPEAN DIARY:Brian Lenihan is back in focus as Ireland’s enormous fiscal problems are coming to the fore again in Europe, writes ARTHUR BEESLEY

IRELAND’S ENORMOUS fiscal problems are coming to the fore again in Europe as the Government wrestles with the Anglo Irish Bank bailout and preparations for a new round of budget cutbacks.

Two years on from the near- death of the banking system, the road ahead is no less dangerous, with market confidence at stake in every single political manoeuvre.

Minister for Finance Brian Lenihan won plaudits from his EU colleagues for his swift efforts to calm the budget deficit, his painful spending cuts portrayed as precisely the sort of action that the Greek authorities should have taken to prevent their economy from falling into the abyss.

That’s history now though as the sheer scale of Anglo’s capital requirement comes into view: €25 billion and counting – colossal no matter what way it’s looked at.

In diplomatic and official circles in Brussels, senior figures express bewilderment and frustration at this state of affairs.

The debate thus far has turned on whether EU competition commissioner Joaquín Almunia sanctions the plan to break Anglo into a “good” and “bad” bank or calls for a medium-term wind- down, with a wind-down now seen as more likely.

Beyond the policy debate, however, the casual reaction at very high levels of the EU bureaucracy is one of astonishment that a single institution could turn so rotten with such appalling consequences for taxpayers. That other leading Irish banks are in dire shape only adds to the disquiet.

The upshot of all this is that Lenihan is back in focus as EU business resumes this week after the summer holiday.

Alongside Greece, Spain and Portugal, Ireland was always included in the “PIGS” group of weaker euro countries. Ireland’s vulnerability became a peripheral issue, however, as Spain came under pressure in the wake of the EU/IMF rescue of Greece.

That is no longer the case. Indeed, a credit rating downgrade by Standard Poor’s (SP) last month was largely attributed to increasing unease at the cumulative impact of the Anglo hex on the national balance sheet.

International media are once again looking askance at Dublin, questioning whether Anglo might overwhelm the State. “Can one bank bring down a country?” the New York Times asked last week.

The answer may well be out of the Government’s hands, as it is debt market investors who determine the price at which Lenihan borrows to keep the administration afloat. Without them there is no survival.

Hence the urgency of resolving the Anglo situation, a process made more difficult because its requirement for capital is predicated on the value at which the National Asset Management Agency (Nama) acquires its soured property loans.

Whereas Anglo argued that the recapitalisation bill could be contained at €25 billion, SP said it could go as high as €35 billion.

Such a variation only fuelled scepticism in Brussels about the break-up plan. Of crucial importance in the days ahead is the necessity for Almunia’s ultimate decision to foster certainty about the extent of the State’s liabilities to the bank.

Lenihan will also have to explain in clear terms how such liabilities will be met. This will not be easy, no matter what option is taken, for he is also saddled with a huge budget deficit and rising unemployment. This will inevitably lead to pressure on the Government’s precarious Dáil majority in the run-up to the budget.

For these reasons, the Minister now finds himself back in the throes of a high-stakes confidence game with investors who, in recent weeks, have driven the gap between the interest charge on Irish and German bonds to record levels.

In so doing he must keep onside his European friends, who learned the hard way this year that a serious deterioration in the fiscal standing of one euro-zone member can place other weaklings in peril and damage the wider currency.

This is a lonely place to be, a point emphasised last week by European Central Bank chief Jean-Claude Trichet when he said it was for the Government alone to resolve the Anglo affair. In so doing, Trichet did not respond directly to the question of whether the bank’s rescue represented an unbearable weight on taxpayers.

Trichet’s remarks belie the extent of help the Government is already receiving from the ECB via special loan facilities for banks and the provision of billions of euros of cash in exchange for Nama bonds. The ECB is also widely reputed to have been a buyer of Irish Government paper after its historic decision last May to purchase debt from euro countries.

All of this means Ireland’s reliance on Europe has never been deeper.

A year ago, the big question was whether Irish voters would change tack and endorse the Lisbon reform treaty, which they did. Back then there was scant fear of a sovereign debt crisis in the euro zone. The Government duly became a willing participant in the €110 billion EU/IMF rescue of Greece and in the wider €750 billion scheme to help any other ailing euro-zone member.

Right now, however, Ireland’s dependence on Europe is a one-way street.