For Ireland, a Life Vest or a Lifeguard?

Nov. 12, 2013 3:00 p.m. ETJust this summer, Ireland and its creditors from the European Union and the International Monetary Fund seemed to agree: When its bailout program runs out this winter, Dublin should jump back into the wild water of financial markets with a life vest—a precautionary credit line from the euro-zone rescue fund—just in case.
But now the Irish government looks more likely to take the plunge without one. Euro-zone finance ministers could give it the go-ahead as early as Thursday, according to European officials, which would make Ireland the first country to exit a full-blown euro-zone bailout.

Ireland’s Finance Minister Michael Noonan Reuters

Spain, which received money in late 2012 only for its banks, has already said that it doesn’t want its aid plan to be extended.
If the Irish decide they want what is being termed a “clean exit,” then that decision can be made at the upcoming ministerial meeting in Brussels, a senior EU official said Tuesday.
Members of the Irish government, including Finance Minister Michael Noonan and his deputy Brian Hayes, note they have until Dec. 15 to make up their minds. But when Mr. Hayes briefed reporters in Brussels this week, his arguments tilted firmly to one side.
“It is important that if you’re back to the markets, you’re back to the markets,” he said. “It is important for everyone to see that the country is not lingering with some kind of additional program with additional conditionality.”
The scars of the last bailout, negotiated in the fall of 2010, still run deep in Ireland. At the time, Dublin was pressured into accepting a €67.5 billion ($91 billion) aid program and to fully repay senior creditors of its busted banks.
The budget cuts and policy overhauls prescribed by the European Commission, the European Central Bank and the IMF to repair the damage to the budget inflicted more financial pain on Irish households.
Three years on, the Irish government is eager to show that this time, whatever happens is its own choice. “No one is forcing us to do something here,” Mr. Hayes said. “This is Ireland’s decision.”
Behind the scenes, Dublin’s choices appear limited, anyway.
Germany, along with Finland, has made it clear that it doesn’t want Ireland to ask for a credit line, according to officials familiar with the discussions among euro-zone countries. Berlin fears that even a line that is never deployed would be seen as a second bailout, making Ireland look too much like Greece, which has had to return to the euro-zone’s rescue funds for more money once already—and may yet have to a third time.
There is also the fear that lawmakers in Berlin might refuse to approve additional aid if Ireland doesn’t increase its 12.5% corporate tax rate—a condition that is a no-go for Dublin.
In light of these obstacles, officials and institutions that had been in favor of the better-safe-than-sorry route are now being less vocal about the risks that Ireland could face in the coming year or so.
Those include an uptick in market concern amid a close review of bank balance sheets, new Europe-wide stress tests on banks next year, or trouble on the sovereign-debt front triggered by problems with Greece.
Renewed market turmoil could force Ireland to negotiate a quick rescue that would likely leave the government worse-off than if it prepared a credit line now. “That is the worst-case scenario,” Mr. Hayes conceded.

But Mr. Hayes said he’s not that worried Ireland will be short of cash soon, pointing to a steep decline in Irish bond yields over the past year and some €25 billion in cash reserves the government has built up, partly through some smaller bond issues in recent months. “That essentially is our precautionary credit line,” he said.
However, a choice by Ireland to go it alone could hurt Portugal, whose bailout program runs out next year and which still faces significantly higher market rates than Ireland.
A lifeline for Dublin would leave less of a stigma on Lisbon if it has to ask for additional support, and could again avoid unwanted comparisons to Greece, officials say.
Mr. Hayes hinted that Ireland might be eyeing a compromise deal, one that would avoid an aid request now, but still signal to markets that it won’t drown even in rough waters.
“There may be the option of a promise, a commitment to look at a precautionary credit line without putting it formally in place,” he said. In other words: Leave the life vest at home, but keep the life guard on site.
—Matina Stevis in Brussels and Eamon Quinn in Dublin contributed to this article.
Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com

Originally posted here: For Ireland, a Life Vest or a Lifeguard?