Reasons behind no deal on debt

The Irish government asks the EU to take over some public debt in the banking sector by the ESM. After Spain got a special programme, prospects for such a proposal may not be too bad.

Further, in saving the banks the Irish State saved assets of lenders — and from the EU.

Thus it seems fair that the EU takes some of the risks, since the EU urged Ireland to take the rescue package in late 2010 and to safeguard its banks.

However, the EU and mainly the German government hesitate to let the ESM step in. From the German view, there may be some more or less good reasons for hesitation.

1. The crisis in Ireland is perceived to be mainly rooted in Irish mistakes. Irish politics did not try to stop the boom. Irish mistakes should be fixed by Irish taxpayers.

2. Germany already has some trouble with Irish banks. Two German banks, the HypoRealEstate and the WestLB, had high losses due to their Irish subsidiaries (Depfa and Phoenix). Now, the HypoRealEstate and the WestLB are state-owned and in liquidation. If the ESM steps in, many Germans may feel ‘not again, an Irish bank’.

3. British banks still have a high exposure in Ireland. Will the British benefit without any commitment if the ESM steps in?

4. Ireland is a rich country with high political stability and a functioning governmental system. The level of ‘sustainable’ debt is much higher for Ireland than for Greece, for example. One could argue that Ireland shall keep the debt because they can manage it.

5. Germany will have federal elections this autumn. German politicians shy away from telling the people that the risks due to rescue packages will increase further.

They fear that the first three reasons may enter the election campaign with bad consequences for the governing parties. In turn, the fourth reason gives hope that hesitation does not endanger financial stability in Europe.

Later negotiations cannot ignore that Ireland has done a lot for European financial stability in recent years and that it is not only the responsibility of the borrower but also of the lender if things go wrong.

* Jens Boysen-Hogrefe is an economist at the Kiel Institute

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