Irish Debt Woes Ease, but the Fireworks Aren't Over Yet

irish bank crisisOver the summer, few things captivated financial markets around the globe like the sovereign debt crisis unfolding in Greece. Now, investors trying to glean the direction of world markets once again find themselves analyzing the internal politics of Europe.

Stock markets worldwide rallied Thursday after Irish authorities showed more signs of being open to aid from outside parties including the European Union and the International Monetary Fund. But final terms have not been determined, and there may be plenty of brinkmanship from Dublin before any agreement is finalized.

And as was the case with Greece, the theatrics surrounding negotiations could lead markets to get skittish even as the situation moves towards resolution.

While a more positive bent towards an aid package calmed investor nerves on Thursday, Irish officials continue to be evasive and noncommittal as the negotiations proceed. Central bank governor Patrick Honohan, for example, said the country was "definitely likely" to seek a large loan but the money would be "shown but not used." Despite growing alarm about its banking sector, the country's representatives remain coy about fully asking for aid.

Sticking Points

Investors should note that Ireland's rock bottom corporate tax rates of 12.5% have been a central point of contention. As the country's banking sector reels from a real estate bust, EU members led by France and Germany have urged Ireland to hike rates.

A French official described the rates as "almost predatory" because of the advantage they give the country in attracting foreign capital, according to the Financial Times. Raising corporate taxes would also give the country more revenue, a German official argued.

Ireland has resisted fiercely thus far, and concerns about the country's sovereignty have played a key role in the process. Some investors, meanwhile, see the advantage Ireland enjoys over European Union rivals in attracting capital through low corporate taxes as the underlying cause of the conflict.

But the outsized diplomatic influence Ireland has enjoyed because of its unique growth model is an even bigger source of irritation to EU powerhouses like Germany and France, according to Marko Papic, Eurasia analyst at global intelligence firm Stratfor. "It's the only country in the eurozone not tied into Germany and France or dependent on Contintental trade," Papic said. That has "allowed Ireland to become a thorn in the side of Franco-German domination."

Its relative independence from the Continent's influence has allowed Ireland to be bold in its resistance to EU pressure. And the country has experience in asserting itself in broader European affairs. Previously, the country helped complicate major initiatives like the Lisbon and Niece treaties, Papic points out.

Corporate Taxes Are Key

Insisting on a change in corporate tax rate policy as part of aid negotiations to deal with the banking crisis could weaken one of the centerpieces of Ireland's economic strategy. But Ireland sees low corporate tax rates as among the main drivers of decades of growth and a booming living standard. Ireland is unlikely to give in easily.

Voters in all personal tax brackets prefer raising personal rather than corporate taxes, Papic said, in a testament to Ireland's firm commitment to the policy.

Of course, it's ultimately in the interest of all parties to reach a compromise. But Ireland has plenty of incentive to hold out for better and less intrusive terms. Investors should recall that Greece too was able to secure far more lenient terms than were initially put on the table after its ability to affect the fortunes of the broader eurozone became clear.

As the Irish drama plays out, talk about cracks in the eurozone are muted when compared to last summer. But more investor anxiety could be in store depending on how tough the aid negotiations turn out to be.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum

17 Comments

Filter by:
btompaint

How involved is G. Soros in this ?????????????????????/

November 19 2010 at 2:00 PM Report abuse rate up rate down Reply
1 reply to btompaint's comment
ebreit19

He's the Master Blaster

November 19 2010 at 2:03 PM Report abuse rate up rate down Reply
Patriotic Paul

Dont they have the same federal reserve over there only with a different name? Bernankes buddies will take REAL good care of them and their future labor.

November 19 2010 at 12:49 PM Report abuse +1 rate up rate down Reply
2 replies to Patriotic Paul's comment
phasejump

You guys are horrible - destroying any chance for an honest conversation

November 19 2010 at 1:59 PM Report abuse rate up rate down Reply
Patriotic Paul

Whats there to talk about? The central Banks all around the world are carrying debt of theses nations and they cant pay the perpetual shakedown money, I mean interst payments. The only logical recourse for the Banks is to lock up future labor as collateral. That means all of theirs and our children will be born into debt.

November 19 2010 at 2:14 PM Report abuse rate up rate down Reply
sabbath

the Irish people should stick it out and not impoverish themselves to the interest debt by the federal reserve system and the jackals at the world bank and EU, more power to them!

November 19 2010 at 11:34 AM Report abuse +3 rate up rate down Reply
ajgorm

The Irish can afford to borrow more they have nothing to lose. Money grows on trees.

November 19 2010 at 11:10 AM Report abuse +2 rate up rate down Reply
1 reply to ajgorm's comment
ajgorm

print till we POP !

November 19 2010 at 11:11 AM Report abuse +2 rate up rate down Reply
ajgorm

l;l;;

November 19 2010 at 11:09 AM Report abuse rate up rate down Reply
Yeeeeeeeeeeha

how humiliating for the Irish to have the Germans and French come in and dictate the terms of a so called bailout. Adding further insult is knowing that this country is barely a generation removed from the holocaust. A little humility and compassion particularly from the German camp (oops)might be in order. My apologies that was a senior moment, a totally irrational notion.

November 19 2010 at 11:03 AM Report abuse +2 rate up rate down Reply
lpi2007

Monday the stocks will go up, I heard the Mexican hammerhead bird will be mating and our worries are over here in the U.S. NO MORE RECESSION, The woolly worm is crawling over our trees Its the first sign of the stocks going up. BUY MORE STOCKS NOW, THE RECESSION IS OVER. LOUISVILLE PARANORMAL INVESTIGATIONS, WE'RE NOT AFRAID OF NOTHING. CHECK OUT OUR SITE

November 19 2010 at 10:36 AM Report abuse rate up rate down Reply
enpassant44

Investors are inured to European economic problems. The market won't react as much as it did with Greece.

November 19 2010 at 10:09 AM Report abuse -1 rate up rate down Reply
ebreit19

gee, we really don't like fireworks. They smell and are very noisy, and in the end, one gets only a few bangs for the buck.

November 19 2010 at 9:48 AM Report abuse +2 rate up rate down Reply
enpassant44

Ha ha! Ireland will have to raise either corporate taxes or personal taxes. I hope they raise corporate taxes. That will level the playing field.

November 19 2010 at 9:47 AM Report abuse +2 rate up rate down Reply