Pressure is mounting on the Irish government to rethink its plans for a "haircut" on the subordinated debt of Anglo Irish and Irish Nationwide Building Society. Photo: AFP "Ireland should honour its debts if it can," said Danny McCoy, head the Irish Business and Employers Confederation (IBEC).
"The country makes a living taking capital from people and looking after it, and you don't want to get a reputation for carrying out partial defaults," he told The Daily Telegraph.
Ireland's financial services industry is around 9.8pc of GDP, with big players such as Merrill and Citigroup operating from Dublin's 'Canary Dwarf'. But foreign investment is also the lifeblood of the country's manufacturing industry, led by computers and pharmaceuticals.
IBEC's comments come amid mounting pressure on the Irish government to rethink its plans for a "haircut" on the subordinated debt of Anglo Irish and Irish Nationwide Building Society (INBS).
Millhouse, the asset management group of Roman Abramovich, is the latest foreign fund to express fury, warning that Ireland faces possible legal action and a "huge reputation loss" if it imposes a haircut on creditors. The fund said it had been "misled and deceived" by the Irish government, though this class of debt was quietly dropped when the guarantee was extended last month.
The exact shape of any "burden-sharing" is still unclear. Brian Lenihan, finance minister, has said the junior bondholders should make a "significant contribution toward meeting the costs" of the state bailout.
These investors took extra risk to enjoy extra yield, and cannot expected shield when the bank collapses. The debt of senior bondholders is considered sacrosanct.
Mr Lenihan has to walk a fine line: talk of debt restructuring for Anglo and INBS conflicts with his other message that Ireland is recovering from the crisis and still enjoys reserves of economic wealth.
Yet like finance ministers across the West, he also has to secure political support for austerity measures. This is increasingly hard to do without forcing bondholders to share at least some of the pain.
Hedge funds also have to watch their step. The political balance of power in Europe is moving against them. If they were to bring a small country like Ireland to its knees, the EU authorities would undoubtedly respond.
IBEC's Mr McCoy said the €40bn(£35bn) total cost of bailing out the banks had landed on the shoulders of 2m people in the Irish workforce, or €20,000 per person.
While this is an understandable cause of anguish, Mr McCoy said savings from a partial default on €3bn of Anglo and INBS subordinated debt, would be a small fraction of this.
Separately, Moody's called for a "credible plan" by the Irish government to bring its budget deficit back to 3pc of GDP by 2014, warning that the country could face a further downgrade. The report had no market impact.
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