Irish debt talks continue in hopes of avoiding broader euro crisis

By Howard Schneider and Anthony Faiola
Washington Post Staff Writers
Wednesday, November 17, 2010; 9:48 PM

As European officials debate a possible bailout of Ireland and replay a crisis script followed earlier this year in Greece, they are also worried about a more pressing question: Can they prevent a series of financial emergencies from tumbling like dominos across the continent?

Portugal, Spain, Italy, Britain and other European countries are facing record deficits and rising public debt, and struggling to convince the market that they can control those shortfalls, restructure their economies and restore growth.

But the investor mistrust that forced Greece to seek emergency help last spring and that now weighs on Ireland can be infectious. The International Monetary Fund and analysts elsewhere have warned that the wheel may well turn - with potentially catastrophic impact.

Greece and Ireland are relatively small economies, as is Portugal, considered by some analysts as a likely candidate for a bailout in the future. But a crisis in Spain, Italy or Britain - all much larger - could deal an even greater blow to global financial markets.

The IMF warned in an October report that markets "are becoming more polarized," with investors willing to quickly abandon a country if they lose faith in its ability to pay its bills or meet its goals for spending and economic growth. The IMF said European and other advanced economies had not spelled out credible plans for controlling record levels of public debt.

With investors on a short fuse, further crisis in one or more of those strapped economies is "almost certain," the agency said.

The possibility of crises spreading to ever-larger European nations has added urgency to the current negotiations.

Britain's top finance official, Chancellor of the Exchequer George Osborne, said Wednesday that his country would help prop up Ireland's ailing finances - even as a team from the IMF and European Union prepared to travel to Dublin to address the crisis and the Irish government signaled, for the first time, that it might be willing to accept a bailout. The talks center on a possible $100 billion fund that Ireland could tap, possibly in support of its troubled banking system.

In Brussels, where European financial chiefs have been holding talks, Irish Finance Minister Brian Lenihan said a "short, focused consultation" with IMF and European Union officials in Dublin this week may result in international support for the Irish banking system.

Ireland's banks are being scrutinized anew as part of the discussions. The Irish government has already nationalized the Anglo-Irish bank and spent tens of billions of dollars suppoting the rest of the banking system and taking over troubled real estate loans.

It's not clear how much more help the Irish banking system might need and whether the Irish government can provide help on its own.

"Despite a large range of measures adopted by the government, Ireland is a small country, and if the banking problems in the country are too big for this small country to manage, Europe is making it clear that they will help and help in every possible way to secure the system because we are part of the euro system," Lenihan told Irish radio.

European officials are looking for a quick decision forceful enough to allay doubts that countries in the euro zone can prop their weakest members. A $1 trillion fund was established by European nations and the IMF in May, during the Greek crisis, to help support European governments that get into trouble.

Although Britain is not among the 16 nations that use the euro currency, it is also involved in the talks, because of the significant investments British companies have in Ireland. Problems in Ireland could drag down British banks and corporations.

"The current EU management strategy has been to ring fence, provide a firewall," to keep the problems contained, said Jan Randolph, who analyzes government debt issues for the IHS Global Insight consulting firm.

Whether that strategy succeeds depends on a raft of factors, including the difficult politics of budget-cutting in Europe, the pace of economic growth, and the psychology of investors.

Many developed nations in Europe and the U.S. have outlined strategies for lowering yearly government deficits and curbing their overall debt, which has been rising during the recent financial crisis and reached levels not seen since World War II. But in its recent review, the IMF warned that governments were relying on optimistic assumptions about economic growth and had not yet specified adequate cuts in spending to control their finances.

schneiderh@washpost.com faiolaa@washpost.com

Faiola reported from Dublin.

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