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

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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.

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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.
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