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Irish, EU, IMF face marathon talks for loan deal

By Shawn Pogatchnik

Associated Press

Published: Friday, Nov. 19 2010 7:38 a.m. MST

DUBLIN — Irish, European and International Monetary Fund officials mounted tough negotiations Friday over terms of a massive credit line for Ireland's debt-crippled banks — with the fate of Ireland's prized low business taxes in the firing line.

Irish officials said talks were under way at several locations in Dublin involving different government departments and agencies and more than 40 officials from the European Central Bank and Washington-based IMF. Most arrived Friday.

The Irish rescue is the latest act in Europe's yearlong drama to prevent mounting debts and deficits from overwhelming the weakest members of the 16-nation eurozone. Greece was saved from bankruptcy in May, and analysts say Portugal could be next in line after Ireland for an EU-IMF lifeboat.

Officials on all sides cautioned that the Dublin talks could stretch into early December, after Ireland gives more clarity on its plans by publishing a four-year outline for slashing €15 billion ($20.5 billion) from its deficit — forecast this year to reach a stupendous 32 percent of economic output.

The Irish government said the plan, to include €4.5 billion in cuts and €1.5 billion in new taxes for 2011 alone, will be published by Tuesday — but won't include any change to its 12.5 percent rate of corporate tax, among the lowest in Europe.

Officials in Germany, France, Britain and Austria argue Ireland should be prepared to raise that rate, which since the 1990s has been Ireland's most powerful lure for attracting the 1,000 multinationals that have chosen Ireland as a European Union base.

They argue it's not fair for Ireland to receive aid from EU partners while simultaneously sticking to a tax policy that amounts to unfair competition.

Ireland says the low tax policy is an essential anchor for keeping employers who generate a fifth of Ireland's gross domestic product and provide the healthiest stream of tax revenue.

Finance Minister Brian Lenihan, speaking ahead of Friday's talks, said the defense of the 12.5 percent rate was "a red line" that Ireland would not allow the IMF to cross.

Ireland has been deeply reluctant to accept any EU-IMF bailout, stressing that the state itself has cash reserves sufficient to last until mid-2011. It fears that any EU-IMF offer will come with too many unpalatable conditions.

But Ireland's hand has been forced by a recent run on deposits at Irish banks, which are already receiving a minimum €45 billion bailout. The European Central Bank has been stemming deposit losses with short-term loans that have ballooned to a reported €130 billion, a quarter of the ECB's eurozone loan book.

Irish media say the ECB last week leaked rumors of its unhappiness with Ireland, triggering the current intervention.

Ireland's representative on the Frankfurt-based bank, Irish Central Bank governor Patrick Honohan, said Thursday he expects Ireland to receive a credit line worth tens of billions of euro that would serve as a backstop for Irish banks struggling to access funds elsewhere.

Critics of Ireland's low tax on business profits say raising it would be the quickest way to increase state income without hurting consumers. According to Eurostat, corporate tax rates in the eurozone average 25.7 percent, and only Cyprus and Bulgaria are lower than Ireland with rates of 10 percent.

Germany and France, whose rates stand at 29.8 percent and 34.4 percent respectively, have spent the past decade grumbling as some of their own companies and a disproportionate share of U.S. multinationals choose Ireland.

"There's only one real reason for that, namely the avoidance of taxes," said Markus Ferber, a member of the European Parliament for the German Christian Social Union, part of Chancellor Angela Merkel's governing coalition.

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