VIEW FROM US:PRESIDENT BARACK Obama's spokesman Robert Gibbs has expressed confidence the European Union can resolve Ireland's debt crisis.
“We continue to believe, as we did with Greece, that Europe has the ability to deal with the crisis in Ireland and possibly in other countries,” Mr Gibbs said yesterday.
US government policy – from the collapse of Lehman Brothers to the Greek crisis to this week – has been "one of overwhelming force, quickly applied . . . Don't let it fester," said Howard Schneider, international economics correspondent for the Washington Post.
At a symposium organised by the Wall Street Journalthis week, US treasury secretary Timothy Geithner would not address the Irish question directly, but said the lesson of Greece was: "You want to make sure you move very, very quickly and you have a combination of policy reforms that help resolve the underlying problem, with some temporary financial support to help countries manage through them."
The Wall Street Journalwas a rare dissenting voice in the rush to see Ireland bailed out.
A bailout “would seem to be intended for the benefit of Ireland’s lenders – banks in Germany and elsewhere,” said an editorial yesterday. The paper compared European plans for a bailout to the Irish bank guarantee of September 2008. “It seems the height of folly for the EU to extend a similar guarantee, even by implication, to the holders of all euro zone sovereign debt.”
Jacob Kierkegaard of the Peterson Institute for International Economics in Washington noted: “American investors own more in Ireland than they did in Greece, whether it is bank bonds, mortgage investments or direct sovereign debt. The same is true for Britain, which is why the British treasury was more forthcoming with financial support for Ireland.”
However, Nigel Gault, the chief US economist at IHS Global Insight, an international forecasting and consulting firm, put US concern over a possible Irish default in the context of the broader euro zone crisis. “For the US, it is the threat that these crises on the periphery could engulf the rest of the euro zone,” Mr Gault said. “It is very important to contain the crisis – that’s really what’s at stake for the US.”
Ireland is particularly vulnerable to a decline in foreign direct investment, which accounts for 60 per cent of GDP.
“There’s probably some reputational damage to Ireland from the crisis, which could affect investment flows,” Mr Gault added. “A lot depends on whether the existing tax regime will stay in place. Ireland’s not a fundamentally low-cost location. The corporate tax rates are extremely important in making Ireland competitive.”
Mr Gault thought the IMF might be more inclined than the EU to allow Ireland to maintain its 12.5 per cent corporation tax rate, because “the IMF will be well aware just how important that tax regime is to Ireland’s growth prospects. One thing you don’t want to do is jeopardise Ireland’s chance of growing in the future”.
David Lynch, a senior writer at Bloomberg who has just published When the Luck of the Irish Ran Out: the World's Most Resilient Country and its Struggle to Rise Again, wrote up a survey on Irish debt last week in which the financial news agency found that "across the board, the sentiment was globally that some sort of restructuring or default was unavoidable".
For Mr Lynch, who set the beginning of his book in the Ireland of the 1980s, there was a particular irony that Ireland may be about to submit to management by the IMF. “In the 1980s, one of the big motivations for Ireland to get its act together was that they would effectively lose control of the economy and the IMF overlords would come in . . . It’s a great tragedy that here we are, a quarter century later, and Ireland stands on the brink, once again.”
The scale of the Irish “banking catastrophe” was so enormous that “in the short term, I suspect there’s no postponing the day of reckoning”, Mr Lynch said, adding that “the medium- and long-term prospects are much better”.
Mr Kierkegaard said the main concern in the US was that “no one in the markets really believes appropriate provisions have been made for the decline in Irish property prices”.
There would have been a bailout already if the Government had not resisted it, Mr Kierkegaard continued. “The clock has started ticking and it’s just a matter of time . . . Now we have to wait for the precise circumstances in which Éamon de Valera’s heirs will hand over Irish sovereignty.
“This is what we are talking about. It is very painful, particularly for the Fianna Fáil party.”