Ireland may be tantalizingly - and reluctantly - close to a bailout but the Old World remains mired in new age debt troubles.
The boom and bust in Ireland and other weak European nations have left a legacy of anemic economic growth, ailing real estate markets, rising unemployment and troubled banks.
"This has calmed the credit markets but it doesn't necessarily address the long-term problem," Simon Ballard, senior credit strategist with Royal Bank of Canada's investment arm in London, said Thursday as Ireland moved closer to taking a rescue package after admitting it needs emergency help. "It's just a short-term fix."
Markets and economists are now betting that Ireland will accept tens of billions of euros in loans from the European Union and the International Monetary Fund, which sent a joint mission to Dublin Thursday to begin talks. Ireland is reluctant to take a rescue package, fearing erosion of its sovereignty and pressure to change its coveted tax system.
But while the immediate fear factor has eased, analysts and economists were under no illusion that Europe's debt crisis is over. Troubles remain in several other countries and another flare-up would set off fresh concerns.
"Comments from Irish government officials and the governor of the central bank suggest that it is only a matter of time before Ireland formally requests financial support," said Ben May of Capital Economics. "For now, though, it remains unclear how large any package will be or exactly how it will be used. And while the latest developments appear to have provided the markets with some reassurance, financial support will by no means be a silver bullet for all of Ireland's fiscal and economic problems."
Thursday's admission by Ireland, considered inevitable by economists and bond traders, came as the European Central Bank made it clear that hollowed-out banks could not rely forever on unlimited liquidity injections from the ECB to keep their doors open. In a speech in Frankfurt, ECB president Jean-Claude Trichet, who has been pushing Ireland to accept a bailout, said the liquidity facility can't "evolve into a dependency as conditions normalize."
Irish officials were up-front Thursday. Irish Finance Minister Brian Lenihan said Dublin would welcome the creation of "substantial contingency capital funding" for the banks.
And central bank governor Patrick Honohan told state broadcaster RTE radio that any loans, which would almost certainly come from the EU and the International Monetary Fund (IMF), would come to "tens of billions," though some economists expect the amount to be much higher.
Ireland's reversal on the need for the loans - it had insisted for weeks that no financial assistance was required - took the edge off the European debt and equity markets. Irish bond prices rose on Thursday, narrowing the premium investors charged to hold them over benchmark German bunds to 5.54 percentage points. The premium reached a record 6.52 points on Nov. 11, pushing up the premiums of the bonds of Portugal and Greece and other countries crippled by high debt loads, yawning budget deficits and stalled growth rates.
Ireland has not officially accepted the emergency loans and may not do so for several weeks. Financial experts from the EU, the IMF and the ECB have only just started to go through Ireland's national accounts and bank balance sheets and portfolios to determine how much assistance might be needed, when it might be needed and under what terms the loans would be offered.
If Ireland formally accepts the loans, the country will become the second EU bailout recipient since last May, when Greece accepted €110-billion ($153-billion) in EU and IMF loans.
Unlike Greece, which sought a bailout as its debt loads and budget deficit exploded, Ireland had the bailout thrust upon it by EU leaders and central bankers, who feared that the Irish economic and banking collapse would ripple through the euro zone, clobber the common currency and raise the bond yields of the weakest countries, to the point they would be shut out of debt markets.
"Political pressure certainly came to bear on Ireland," said RBC's Mr. Ballard. "Ireland finally realized there was no benefit to resisting - take the money and put it in an escrow account until it's needed, or not."
The pressure on Ireland, it appears, was also designed to protect the British and euro zone banks that have a heavy exposure to the Irish economy and its banks. The extensive exposure explains why George Osborne, Britain's Chancellor of the Exchequer, said Wednesday that "Britain stands ready to support Ireland to bring stability."
British banks, among them Royal Bank of Scotland and Lloyds Banking Group, have the greatest exposure in the world to Ireland - the equivalent of about $222-billion (U.S.) early this year - according to the Bank for International Settlements. Germany ranks a close second, with about $206-billion in Irish exposure.
According to Bloomberg, RBS, which is 83 per cent owned by the British government, had £53.3-billion ($85-billion) of loans in Ireland at the end of September, while Lloyds, which is 41 per cent government owned, had almost £27-billion of Irish exposure at the end of June.