Ireland, The New Battle Over Sovereign Debt, And Merkel’s Job

There has been a threat that one of the nations in the EU which received a bailout would reject the terms of the lifeline. That may be about to happen in Ireland, and it could affect the future of sovereign debt for years, perhaps driving private capital from the markets. It may also alter the course of Germany’s political future.

The Fine Gael party will end up with the largest number of seats in the Irish Parliament, as many as 77. This would allow it to form a powerful coalition.

“European Commission President Jose Manuel Barroso spoke last night of his hopes for `constructive co-operation’ with the new Taoiseach,” according to the Irish Independent. That cooperation may be strained from the start.

Fine Gael candidates ran at least in part on their objections to how the ruling Fianna Fail party handled the government’s finances. This includes the debt level of the nation and the terms of the 65 billion euro bailout Ireland received from the IMF and EU nations. Many Irish voters have chaffed at both the size of the bailout and interest terms.

It is unlikely but possible that the new Irish government will reject the terms of the loans completely. It is more likely it will seek better terms. That will almost certainly pit Ireland against the IMF and Germany, the  biggest EU nations by GDP and largest contributor to bailout funds.

Greece has already begun to talk with EU and IMF lenders about extending the period over which it will pay back its bailout funds. Some debt experts believe that the long-term economic situation with Greece will force it to eventually default on its current obligations. Better to make the terms of loans more favorable than to deal with an outright financial disaster. Greek citizens have protested the deal many times and this has badly battered the economic recovery. Whether the IMF and EU will modify Greek loans because of this activism is a matter that has been kept confidential, at least for now.

Greece and Ireland, each encouraged by the revolt of the other, may force lenders to change both the interest rate and duration of loans. Germany may be forced to accept new terms to keep the fate of the euro from being undermined. Angela Merkel has already had some of her electoral support erode in Germany. She has to walk a fine line because her fate may be similar to the fate of the politicians just thrown out in Ireland.

The ruling party in Ireland lost power because it would not negotiate more favorable terms on it bailout loans. Merkel may be thrown out if she does.

Douglas A. McIntyre