Irish Finance Minister Brian Lenihan has been wearily repeating himself over the past few days, but no one in Brussels really believes him. Despite his insistence that Ireland does not need a bailout, the consensus among European Union officials is that the cavalry will be summoned, and soon.
Indeed, in a crushing blow to Lenihan's hopes that Ireland could ride out its debt crisis alone, bailout plans were already being laid down on Tuesday night. It was then that Lenihan caved in to pressure from central bankers and his fellow E.U. finance ministers and agreed to allow experts from the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) to be dispatched to Dublin to examine how any emergency aid package could help buttress Ireland's battered banks.
The Irish government is still resisting: it has refused to ask for an immediate bailout despite the voices warning ominously about contagion. Speaking in Brussels on Wednesday before another meeting of E.U. finance ministers, Lenihan described the mission to Dublin more in terms of a fact-finding outing than an outside takeover of Irish government finances. "What we have agreed to do is to look at the structural problems in the Irish banks in the light of recent market pressures and assess what needs to be done," he explained. He has contrasted Ireland's situation with the Greek debt crisis by pointing out that the Irish government is "fully funded" with enough reserves to stagger on until next summer, so it does not need to raise money from the markets now.
But the markets' jitters about Ireland's debt have prompted extreme anxiety for the rest of Europe. Just six months after E.U. governments and the IMF set up a colossal €750 billion ($950 billion) crisis fund to bail out the near-insolvent Greece, another euro zone economy is tottering, seemingly in need of emergency intervention.
The frayed nerves were exposed when European Council President Herman Van Rompuy said the E.U. faces a "crisis of survival" over its deepening debt problems. "We must all work together in order to survive with the euro zone, because if we do not survive with the euro zone, we will not survive with the E.U.," he said Tuesday. German Chancellor Angela Merkel used equally apocalyptic language: "I'm telling you, everything is at stake. If the euro fails, then Europe will fail. And with it fails the idea of European values and unity."
Others have tried to dampen the doomsday rhetoric. E.U. Economic Affairs Commissioner Olli Rehn warned of "existential alarmism", while euro-zone Chairman and Luxembourg Prime Minister Jean-Claude Juncker said that although fellow member states were ready to help if or when a request came, the responsibility for asking remained with the Irish government.
In a sense, Lenihan is right: this is not a replay of the Greek crisis. While Ireland's budget deficit this year is an eye-watering 32% of GDP, its main problem has been the bloated, loss-making banking system. Over the past two years, several banks have been partially nationalized, meaning most of their massive debt is now actually government debt. In fact, the shrieking budget deficit was actually caused by the bank bailout, meaning the country's bank debt is the highest in the world, at around €14,000 ($18,950) for every Irish citizen.
As a result, Ireland's borrowing costs have soared, and the cash-strapped banks have had rely on the ECB to finance their daily operations. This has a knock-on effect for other euro-zone countries. Although Ireland's banking crisis is essentially a national malady, other countries especially vulnerable euro-zone members like Spain and Portugal worry about being infected as Irish banks bump up the cost of international borrowing. The fears are so serious that even the British government, which remains implacably opposed to joining the euro, has said it is ready to support any bailout.
Simon Tilford, chief economist at the London-based Centre for European Reform, says that unless the E.U. intervenes, investors will believe that default is inevitable and demand correspondingly punitive interest rates. "Contagion to other member states will be all but inevitable," he says. "If, and when, it reaches Spain, the crisis risks spiraling out of control."
How would an Irish bailout work? London-based investment bank Barclays Capital says the E.U. and IMF would need to loan €80-85 billion ($109-116 billion) to cover Ireland's sovereign funding needs and recapitalize its failed banks. Yet it might be very different from the intervention earlier this year to save Greece: Officials say the bailout could directly restructure the banking sector rather than go through the government, thus avoiding complicated constitutional and institutional issues. But that means the E.U. and the IMF would have to make key policy demands to reform Ireland's economy before unleashing any aid. "There will be some sort of assistance, but it is still up in the air about how," says Nicolas Véron, senior fellow at Bruegel, a Brussels-based economic think tank. "It is complex, because with the state ownership of the banks, it's hard to see where exactly government responsibility lies."
And beyond the mechanics of a potential bailout, there is the political cost. Having once dubbed itself the Celtic Tiger, Ireland is now a very sick kitten, and the symbolism of a humiliating bailout would mean a big loss of face for this proud, independent country. For Brian Lenihan, asking for outside help could also spell the end of his political career. But it might just save his country too.