DUBLIN — Ireland edged toward taking a bailout loan from the European Union to bolster its debt-crippled banks — but the prospect offered little reassurance that other corners of Europe could cope with their own crushing levels of government debt.
After Greece and likely Ireland, analysts say Portugal may be the next country in the 16-nation eurozone to need assistance. They suggest the crisis is now being driven less by irrational fears than by a growing realization that debts are too big for vulnerable nations to refinance, never mind pay back.
Experts from the European Commission, European Central Bank and International Monetary Fund descended Thursday on Dublin to explore the scope and terms of a bailout. European officials agreed to send them at a summit Tuesday after weeks of Irish denials that they required any emergency aid. The talks were to run into next week.
Irish Finance Minister Brian Lenihan insisted his government needed no money itself because it's fully funded through mid-2011. But Lenihan said he would welcome a "contingency capital fund" — a backstop for the country's troubled banks — effectively an overdraft or credit line.
The government appeared determined to defend its prerogatives in bailout talks, which typically involved the aid recipient agreeing to the creditors' conditions to improve its finances. In Ireland's case, Deputy Prime Minister Mary Coughlan declared that keeping Ireland's 12.5 percent rate of corporate tax "is non-negotiable." It's a key attraction for businesses, but EU heavyweights such as Germany and France don't like the tax because theirs are higher.
Such inflexibility, while widely supported in Ireland, has been questioned elsewhere as unrealistic.
"When does denial turn into delusion?" Joan Burton, finance spokeswoman of the opposition Labour Party, said to Lenihan and Coughlan. She accused the government of lying to the public about the inevitability of a bailout.
All across the eurozone, analysts say, debt-burdened governments are living in denial about their weakening power to keep drumming up fresh finance from skeptical bond markets and foreign banks.
Weak growth means Greece remains vulnerable to eventual default, or a second rescue, when its current €110 billion EU-IMF loans come due for repayment in 2013. Portugal and Spain are hoping the interest rates on their bonds will fall once the EU and IMF cap concerns about Ireland.
The immediate focus is on Dublin because its banks have broken the patience of their major recent source for funding, the European Central Bank. Losses at five Irish banks, all of them nationalized or with major state stakeholdings, have required a €45 billion ($62 billion) government bailout that has pushed the Irish deficit this year to an unprecedented 32 percent of GDP.
The Irish Central Bank, controversially, has also made its own ECB-authorized loans to the banks, taking total ECB exposure in Ireland above €130 billion, a quarter of its book.
Irish Central Bank governor Patrick Honohan forecast that Ireland would negotiate a loan facility with the EU and IMF worth "tens of billions." He said the funds would be a financial "buffer" for Irish banks that would reassure markets the banks could pay and thus could be "shown but not used."
While Ireland two months ago quit the bond market, citing the punitive rates being demanded, Spain, Italy, Portugal and Greece haven't had the option of waiting it out and have been borrowing at increasing rates from jittery bond markets. Paying progressively higher rates can leave a country unable to roll over its debt, or borrow to pay off expiring bonds, as happened to Greece when it was rescued from bankruptcy in May.
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