LONDON (MarketWatch) — Ireland’s low corporate tax rate isn’t responsible for Europe’s debt woes, but a battle over the levy is adding yet another layer of uncertainty to the euro-zone’s long-running sovereign debt crisis.
The Irish 10-year government bond yield pushed above 10% Thursday, while short-term two-year yields also traded near double digits, underlining fears that the 85 billion euro ($120.1 billion) European Union-International Monetary Fund bailout provided last autumn won’t be enough to ensure Dublin avoids default.
“Not only does this suggest that investors are pricing in a higher chance of government default, it seems that they now expect it to happen sooner than they did a few weeks ago,” said Ben May, European economist at Capital Economics.
The turmoil isn’t just about Ireland. Portuguese and Greek bond yields have also jumped this week. Portugal is expected to seek a bailout after its parliament rejected additional austerity measures on Wednesday. Read "Portugal turmoil intensifies bailout talk."
And bickering over a number of issues is seen delaying an agreement on a comprehensive package of measures European Union leaders hope will bring the euro-zone’s long-running debt saga to an end.
But Ireland is certainly part of the mix, economists said.
Newly-elected Irish Prime Minister Enda Kenny has shelved plans to seek a break on the interest rate, near 6%, charged on the EU portion of the rescue at the two-day summit of EU leaders getting under way in Brussels Thursday. Kenny has said he will wait until after a new round of bank stress test results are published next week.
The quest for easier terms is clouded by the dispute over Ireland's headline corporate tax rate, which at 12.5% is the lowest in the EU.
Kenny was stymied by French President Nicolas Sarkozy and German Chancellor Angela Merkel in his quest for a reduction in the interest rate at a March 11 summit meeting, with France and Germany insisting Ireland move to address objections to its tax rate.
The same meeting saw Greece’s interest rate reduced by a percentage point in return for Athens’s pledge to implement further reforms.
Ireland’s tax rate is a long-running source of resentment for France and, in particular, Germany, said Kevin Conway, a tax partner at King & Spalding.
Numerous German banks and insurers have set up shop in Ireland to take advantage of the lower rate. Germany’s combined corporate income tax rate in 2010 was 30.18%, according to the Organization for Economic Cooperation and Development. France’s rate was 34.43%.
“Residual resentment has always been there,” Conway said.
And Dublin clearly resents the backlash. Kenny dug in his heels at the March 11 meeting, exchanging “strong words” with Sarkozy over the issue, according to news reports.
In Ireland, the low corporate tax rate is viewed as a key component of the country’s economic transformation, greatly enhancing a range of efforts designed to make the nation an attractive destination for multinationals to set up facilities and hire workers.
“If you’re going to raise the rate, you might as well close the door and knock out the lights,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.
Multinationals account for 75% of Irish exports and has attracted foreign direct investment, he said.
Given the size of the multinational presence in Ireland, raising the tax rate in order to get a one percentage point break on the EU’s €67.5 billion portion of the bailout wouldn’t be a sound trade-off, said Brian Devine, chief economist at Dublin-based NCB Stockbrokers.
Even opening the door to future tax moves by backing new EU proposals on the calculation of corporate taxes, a measure known as the Common Consolidated Corporate Tax Base, would potentially run the risk of being viewed as a precursor to tax hikes, McQuaid said.
Kenny was quoted as describing the CCTB proposal as “harmonization by the back door,” although the Irish Times on Monday reported that ministers were weighing such a proposal.
It’s more likely that Ireland will eventually find some other way to appease Berlin and Paris without compromising on the tax regime, such as by agreeing to implement the “debt brake” that Germany is pushing to be adopted by all euro-zone countries, McQuaid said.
Ireland could also threaten to force senior bank bondholders to take writedowns, a measure that would potentially hit German banks hard and also spark fears of a selloff of bank debt across the euro zone, analysts say.
But such a move is unlikely, McQuaid said, because such tactics would sour relations with Ireland’s EU partners.
In the end, however, Ireland may be better off waiting to strike a deal until after the publication of the latest round of stress tests, economists said.
Capital Economics’s May said concerns are growing that a planned capital injection of €10 billion, equal to about 6% of GDP, may not restore bank capital ratios to a healthy level. Instead, the tests may reveal that a large portion of the €25 billion bank contingency fund, which is part of the EU-IMF bailout package, will have to be injected into the banks, he said, in a research note.
“Given that past stress-test results have consistently underestimated the cost of the banking crisis, markets will remain wary of lending to Irish banks for some time yet, regardless of the latest results,” May said.
Source: www.marketwatch.com
The Irish 10-year government bond yield pushed above 10% Thursday, while short-term two-year yields also traded near double digits, underlining fears that the 85 billion euro ($120.1 billion) European Union-International Monetary Fund bailout provided last autumn won’t be enough to ensure Dublin avoids default.
“Not only does this suggest that investors are pricing in a higher chance of government default, it seems that they now expect it to happen sooner than they did a few weeks ago,” said Ben May, European economist at Capital Economics.
The turmoil isn’t just about Ireland. Portuguese and Greek bond yields have also jumped this week. Portugal is expected to seek a bailout after its parliament rejected additional austerity measures on Wednesday. Read "Portugal turmoil intensifies bailout talk."
And bickering over a number of issues is seen delaying an agreement on a comprehensive package of measures European Union leaders hope will bring the euro-zone’s long-running debt saga to an end.
But Ireland is certainly part of the mix, economists said.
Newly-elected Irish Prime Minister Enda Kenny has shelved plans to seek a break on the interest rate, near 6%, charged on the EU portion of the rescue at the two-day summit of EU leaders getting under way in Brussels Thursday. Kenny has said he will wait until after a new round of bank stress test results are published next week.
The quest for easier terms is clouded by the dispute over Ireland's headline corporate tax rate, which at 12.5% is the lowest in the EU.
Kenny was stymied by French President Nicolas Sarkozy and German Chancellor Angela Merkel in his quest for a reduction in the interest rate at a March 11 summit meeting, with France and Germany insisting Ireland move to address objections to its tax rate.
The same meeting saw Greece’s interest rate reduced by a percentage point in return for Athens’s pledge to implement further reforms.
Ireland’s tax rate is a long-running source of resentment for France and, in particular, Germany, said Kevin Conway, a tax partner at King & Spalding.
Numerous German banks and insurers have set up shop in Ireland to take advantage of the lower rate. Germany’s combined corporate income tax rate in 2010 was 30.18%, according to the Organization for Economic Cooperation and Development. France’s rate was 34.43%.
“Residual resentment has always been there,” Conway said.
And Dublin clearly resents the backlash. Kenny dug in his heels at the March 11 meeting, exchanging “strong words” with Sarkozy over the issue, according to news reports.
In Ireland, the low corporate tax rate is viewed as a key component of the country’s economic transformation, greatly enhancing a range of efforts designed to make the nation an attractive destination for multinationals to set up facilities and hire workers.
“If you’re going to raise the rate, you might as well close the door and knock out the lights,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.
Multinationals account for 75% of Irish exports and has attracted foreign direct investment, he said.
Given the size of the multinational presence in Ireland, raising the tax rate in order to get a one percentage point break on the EU’s €67.5 billion portion of the bailout wouldn’t be a sound trade-off, said Brian Devine, chief economist at Dublin-based NCB Stockbrokers.
Even opening the door to future tax moves by backing new EU proposals on the calculation of corporate taxes, a measure known as the Common Consolidated Corporate Tax Base, would potentially run the risk of being viewed as a precursor to tax hikes, McQuaid said.
Kenny was quoted as describing the CCTB proposal as “harmonization by the back door,” although the Irish Times on Monday reported that ministers were weighing such a proposal.
It’s more likely that Ireland will eventually find some other way to appease Berlin and Paris without compromising on the tax regime, such as by agreeing to implement the “debt brake” that Germany is pushing to be adopted by all euro-zone countries, McQuaid said.
Ireland could also threaten to force senior bank bondholders to take writedowns, a measure that would potentially hit German banks hard and also spark fears of a selloff of bank debt across the euro zone, analysts say.
But such a move is unlikely, McQuaid said, because such tactics would sour relations with Ireland’s EU partners.
In the end, however, Ireland may be better off waiting to strike a deal until after the publication of the latest round of stress tests, economists said.
Capital Economics’s May said concerns are growing that a planned capital injection of €10 billion, equal to about 6% of GDP, may not restore bank capital ratios to a healthy level. Instead, the tests may reveal that a large portion of the €25 billion bank contingency fund, which is part of the EU-IMF bailout package, will have to be injected into the banks, he said, in a research note.
“Given that past stress-test results have consistently underestimated the cost of the banking crisis, markets will remain wary of lending to Irish banks for some time yet, regardless of the latest results,” May said.
Source: www.marketwatch.com
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