Playing Irish Chicken

I have to admit I only partially understand the Irish debt crisis. Apparently, the Irish property bubble burst, depressing their economy and nearly bankrupting their financial institutions. But why the big push to get the Irish to accept an IMF and EU bailout? And why the Irish reluctance? Here's a few dots to connect.

First off, the Irish have one big competitive advantage when it comes to jobs and growth. They have a very low corporate tax rate. Under a normal bailout, the EU and/or IMF could stipulate that Ireland would have to raise taxes to get the cash. Not so fast, say the Irish.

The Irish are a nation of gamblers. The country may be struggling with the burden of a huge government deficit, soaring borrowing costs and a deeply damaged banking system, but it would be dangerous to bet against Dublin winning its high-stakes game of poker with the European Union over a possible bailout.

Ireland's aim is to secure a deal on the most favorable terms, including crucially the retention of its ultralow corporate-tax rate, a potent symbol of economic sovereignty that the minority Fianna Fail government is determined to protect at all costs ahead of next year's likely elections.

Dublin still has the strongest hand. The first thing in its favor is that no one can force it to accept a bailout; Ireland has to ask the European Union for help. And given the Irish government is fully funded until the middle of next year, it can in theory drag this situation out for months. If it did that, of course, contagion would likely spread quickly across the euro zone, as Tuesday's stock and bond selloffs showed, threatening the survival of the common currency. In that sense, Ireland is armed with a nuclear weapon.

So the Irish may well end up taking the money, but on their own terms. The EU has to worry about appearances as investors are getting nervous about Spain and Portugal.

On Wednesday, Lisbon sold €750 million of 12-month Treasury bills, but paid investors a painfully-high interest rate of 4.8% compared with 3.3% earlier this month. Interest rates don’t usually jump that much in, like, two weeks.

Were it to borrow for 10 years, Portugal, a small European economy with weak growth prospects, would probably have to pay an interest rate of 6.87%, based on market prices, compared with 5.86% in early September.

Spain, Europe’s fourth-biggest economy, would have to pay 4.62% to borrow for 10 years compared with 4.06% two months ago. It will be in the market selling long-term debt on Thursday.

The longer the Irish delay, the more it looks like the EU's problems are out of control, causing more investors to take their money out of Europe. Of course, as Nouriel Roubini would probably tell you, the whole game is rigged and in the long run, what the EU fears is not a chance, but a certainty.

Spain's timid economic recovery stalled in the third quarter as government austerity measures, high unemployment and weakening exports weighed on the economy.

Short version: They borrowed too much money to blow on things they didn't need and now they've got to pay the bills. Like a family who took out credit card and home equity loans to buy jetskis and a swimming pool, the Euros spent money they didn't have on social programs that weren't investments, they were wish fulfillments. In the end, it doesn't matter whether the Irish take the bailout or not. There's nothing that's going to stop the inevitable collapse in Portugal, Spain and Italy. Borrowing from your brother to pay this month's credit card minimums just means that you declare bankruptcy a month later.

The reason the Irish have leverage over the EU is the fact that the Euros have yet to fully accept reality. Socialism has failed. Again. Sooner or later, there's going to be a very messy cleanup for having believed in it.

Even though the cliff is just 500 yards away, the EU is convinced it can stop the train in time.