Six months after a slow and fractious negotiation process ended in a European Union and International Monetary Fund bailout of a debt-wracked Greece, Ireland became the second eurozone economy to need an emergency rescue.
On Monday, European and IMF officials began thrashing out the details of the three-year bailout package, the precise amount of which is not yet known. Irish Finance Minister Brian Lenihan has, however, insisted that the final amount will be less than euro 100 billion. Most analysts place the expected figure at somewhere between euro 80 and 100 billion.
The deal between Ireland and the EU took shape late on Sunday, following weeks of Dublin insisting it could manage to set its own house in order and did not need a bailout. But signs of investor flight from flailing Irish banks eventually left Ireland no choice, forcing its hand into making the aid application which was promptly accepted by EU finance ministers.
While Greece’s sovereign debt crisis had been brought on by financial irregularities, and mismanagement, Ireland’s emergency stemmed from deeply troubled banks, riddled with bad loans following a real estate sector collapse.
Over the last few months Irish banks found themselves unable to borrow on global markets even as they lost billions in deposits. At the same time, the government, which has plowed in more than euro 45 billion into the banking sector in an attempt to shore it up, faces a huge budget gap from collapsed tax revenues. The country’s budgetary deficit rose to an enormous 32 per cent of GDP this year, the highest among the eurozone nations.
On Monday, however, stock markets and the euro rallied following the bailout announcement and Ireland’s borrowing costs fell.
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Nonetheless, as in the case of Greece, doubts as to the long-term effectiveness of the aid package remain, with fears that Portugal and Spain may be the next countries in need of rescue.
The Irish bailout is the first test of the euro 750-billion system of emergency loans for indebted eurozone countries set up by the EU and IMF earlier this year, following the euro 110 billion loan to Greece.
European officials are quick to point out the divergence in the response of eurozone countries to the Greek and Irish crises. Whereas the months that preceded Athens’ bailout were characterised by internal wrangling and indecisiveness, in the Irish case the EU has been on hand to offer help throughout.
Yet, when the emergency fund was set up, it was hoped that it would never, in fact, be needed. Its existence alone was enough to reassure markets that euro zone countries wouldn’t be caught unable to pay off their debts. These were the hopes that Sunday’s developments have dashed.
Many analysts argue that the fiscal rot will not stop with Ireland, since the availability of bailout money in itself does not resolve the underlying problems and tensions within the euro zone. Some argue it’s akin to putting a bandage on a broken arm.
To begin with, the success of the bailout will depend on the ability of Ireland’s government to impose the kind of severe budget cuts that it might not be able to deliver in practice. Moreover, the bailout, while helping to prevent an outright default, does not assist the country’s economy back on a growth path. In fact, forced austerity measures make an economic turnaround difficult to envisage and financial markets are likely to remain jittery.
The details of Ireland’s rescue package are expected to be made public by the end of this month. Irish banks will be pruned down, merged or sold as part of the programme. One potential area of conflict between Dublin and the EU is on the Irish insistence that its corporate tax remain unchanged. At 12.5 per cent, it is the lowest rate in Europe and other euro zone countries like Germany and France view it as an unfair way of luring companies to Ireland at the expense of other European nations.
In addition to the EU-IMF package, the UK and Sweden (both non-euro zone countries) have also stepped forward with offers of bilateral loans to Ireland. On Tuesday, Dublin will unveil its own four-year plan for budget cuts aimed at reducing the budgetary deficit to 3 per cent of the GDP by 2014. The plan will now require EU-IMF approval.