Ireland's $90 billion question: Does it need a bailout?

The Irish continue to play high-stakes hopscotch with the European Union. While Ireland has agreed to host a delegation of EU experts and International Monetary Fund officials tomorrow in preparation for a bailout package, it still insists it does not need one.

Amid heavy pressure at an EU finance ministers meeting today that was intended to convince Ireland to take a major Greek-style bailout, Ireland said it needed only a loan to bolster its troubled banking sector, which is saddled with at least $90 billion in bad debt due to Ireland's real estate market collapse.

But the Irish crisis is further straining a union of nations tied together by a single currency rather than a single political structure. Echoing this sentiment, EU chief Herman Van Rompuy claimed that nothing less than the future of the EU is at stake in the Irish debt crisis, which is continuing to shake investor confidence. The euro traded against the dollar today at a seven-week low.

But others are questioning the main premise behind the bailout – that it would keep markets stable and protect debt-strapped nations like Spain and Italy.

“What we are all talking about now is whether these bailout packages answer the question,” says Rym Ayadi, senior research fellow at the Center For European Policy Studies in Brussels. “I’m not sure the packages provide a firewall at all. Greece is not yet out from the turmoil, and it isn’t clear that bailout will solve the problems that next cases like Portugal have.”

Iain Begg at the London School of Economics, argues the sheer size of the $1 trillion fund agreed to last May will keep markets calm and avoid a feared larger crisis.

“I’m reasonably optimistic. The EU is an institution that will walk to the precipice, look down, and say ‘We’re not going to jump,'" he says.

Still, he says unforeseen market reactions can always cause problems. “I think the emerging mid-term picture is fine. The question is whether you can get there from here. Ireland feels it is in the jaws of the market, and in crisis.”

Is a bailout inevitable?

The situation highlights differences in the eurozone between nations like Finland, Poland, Germany, and Sweden that have bounced back from the global economic crisis and states like Portugal, Ireland, Spain, and Greece that have not.

Analysts are fairly sure Ireland will take some kind of package – a bailout by the EU stability fund offers much lower interest rates than Ireland can find in the market, where it is now paying around 8 percent.

EU finance chief Olli Rehn appeared to put a spike in efforts by Ireland to seek bailout money directly for its banks that would come with fewer restrictions. He told reporters any loan to Ireland would be channeled through its government.

As Ireland negotiates with the IMF and the EU in coming days, Greek officials are seeking to restructure their $110 billion loan package from last spring. Portugal, which suffers from a different mixture of consumer, public, and bank debt, is expressing concern over difficulties borrowing money.

Germany's role

Germany is also under fire from “peripheral” EU states like Greece, Portugal, and Ireland, who argue that it's insistence on strict austerity measures for natioal governments is pushing their economies to the brink.

German chancellor Angela Merkel earlier this week disputed the charge, and said, “Everything is at stake” in the crisis. “If the euro fails, then Europe will fail.”

British Finance Minister George Osborne weighed in at a meeting of 27 EU finance minister today, saying Britain, which earlier counseled Ireland not to enter the eurozone, “stands ready” to assist: “Ireland is our closest neighbor. And it's in Britain's national interest that the Irish economy is successful and we have a stable banking system.” British and German investors own about $288 billion in Irish debt.

For Ms. Ayani, the main question is whether an Irish or a Portuguese bailout will be enough, “once it is back to business with the markets. I’m worried we are just filling holes for today and that in a few weeks we will see the same problems.”