Ireland is resisting a bailout out of fear that any deal would jeopardize its economic sovereignty and force it to scrap the low-tax system that made Dublin a magnet for global companies.
Ireland's stance stems in good part from its desire to protect its rock-bottom corporate tax status, the feature credited with launching its economic miracle in the 1990s, turning one of western Europe's poorest countries into one of its wealthiest, with remarkable speed, analysts and economists say.
"The government does not wish to give up its preferential corporate tax system, which EU [European Union]financial assistance might require," said Mike Lenhoff, chief strategist in London for Brewin Dolphin, a British investment firm.
Any EU bailout, especially one with the Washington-based International Monetary Fund at its side, could come with considerable loss of economic sovereignty because assistance would come with conditions, ranging from strict lower debt and budget deficit ratios to higher revenue targets and tough austerity programs.
The European debt troubles, coupled with concerns that China may soon raise interest rates, drove stocks sharply lowered Tuesday, with the Dow Jones industrial average down 1.6 per cent and the S&P/TSX composite shedding 1.1 per cent. The U.S. dollar climbed and commodity prices slipped, pushing down the Canadian dollar by 1.29 cents.
European Union monetary affairs chief Olli Rehn said "the Irish authorities are committed to working" with the EU, the European Central Bank and the International Monetary Fund to calm market turmoil. Though Ireland hasn't asked for a bailout, Mr. Rehn said Tuesday there was "an intensification of preparations of a potential program in case it is requested."
The Irish corporate tax rate, at 12.5 per cent, is one of the EU's lowest and has been instrumental in attracting big-name corporations, including Pfizer, Google and dozens of international banks and investment firms to set up operations in Dublin. The government has said the tax rate is sacrosanct, though Germany and other sponsors of any bailout package might have a different view.
The Irish government has to deliver a new budget on Dec. 7 and will naturally resist including corporate, personal, property or value-added tax increases because any such increases would require an immediate parliamentary vote. "Were the vote not to pass, for all intents and purposes it would be a vote of no confidence in the government and an election would be triggered," a recent Deutsche Bank report said.
Ireland is governed by a fragile coalition, whose parties include Prime Minister Brian Cowen's own centrist Fianna Fail party, the Green Party and several independent members of Parliament. If the government were to fall, Ireland might face political, on top of economic, turmoil when it can least afford it. Deutsche Bank speculates that the Irish government, should it survive the December budget, might want to call a general election before negotiating conditional bailout loans.
The Irish government on Tuesday acknowledged its soaring bond yields were at crisis levels but said it was not seeking help and that its aggressive spending cuts could restore investor calm.
Mr. Cowen told parliament that "the cost of money is simply too high … We have to find further initiatives within the euro area to deal with the matter and that is precisely the discussions that are ongoing and which [Finance Minister]Brian Lenihan is attending today and representing our interests in that matter."
It was unclear whether Mr. Cowen's desire to bring down financing costs meant he recognized he would eventually be forced to accept a package that would shore up the state or, as seems more likely, Ireland's gutted banks. The banks' estimated €50-billion ($68.8-billion) in Irish taxpayer-funded assistance will propel the country's budget deficit to 30 per cent of gross domestic product in 2010.
The European Union continued to put pressure on Ireland to accept some sort of bailout, for fear that contagion would lead to a repeat of last spring's Greek funding crisis, which nearly destroyed confidence in the euro. The Greek crisis was stemmed by a €110-bailout financed by the EU and the International Monetary Fund.
On Tuesday, EU president Herman Van Rompuy said that the EU is in a "survival crisis" and that "we all have to work together to survive, with the euro zone, because if we don't survive with the euro zone, we will not survive with the European Union."
Ireland's resistance to financial aid sent Irish bond prices down again on Tuesday. The spread over benchmark 10-year German bonds, considered the safest in the EU, widened by 23 basis points, to 585 basis points, on the day.
Euro zone finance ministers met in Brussels on Tuesday to discuss ways of bringing down Ireland's soaring finance costs. The ministers are to meet again on Wednesday to try to thrash out an aid package for Ireland or its banks, though there was little indication that a plan would formed quickly.
Jose Manuel Amor, strategist with the Madrid financial consultancy AFI, said he understands why Ireland is not willing to embrace a bailout - at least not yet. He said Ireland considers itself "the best pig in the PIGS sty," referring to the acronym for Portugal, Ireland, Greece and Spain, the countries hit worst by the debt crisis, and probably believes it can tough it out.