Irish bailout: An Irish bailout would make markets happy, but Germans sad. The country is in talks about tapping the European Financial Stability Facility but will not impose a haircut on borrowers, Reuters reported on Nov. 12. If a deal is struck, markets will rejoice. But EU taxpayers will pay the full price.
Like the Greek rescue, an Irish bailout will need to be big. The country requires up to 85 billion euros in order to avoid tapping sovereign debt markets until the end of 2013, according to Barclays Capital. That would allow it to reduce its fiscal deficit and stabilise its national debt, which has ballooned to an expected 106 percent of GDP in 2011.
For Ireland, any deal will bring financial relief and allow the government to avoid a further round of spending cuts. The political will to do so was waning, and the economic risk was that more cuts would exacerbate the debt deflationary trap into which Ireland has plunged. Nevertheless, austerity will remain in place.
Any deal would provide a test for the EFSF, which was set up earlier this year but which politicians hoped would never be needed. It would also raise questions about which country is next. Portugal’s sickness is different to Ireland’s but equally dangerous. Though bad debt is not so much of a problem, the economy in many ways is in worse shape: its trade and budget deficits are large, debt is rising fast, and its growth record is lamentable. If Portugal is also rescued, the focus will shift to Spain.
Meanwhile, EU taxpayers will face the full rescue bill. German Chancellor Angela Merkel, who struggled to persuade Germans to rescue Greeks, will find it hard to justify further largesse. After weeks of loose talk about bondholders sharing the pain - which helped trigger the latest jitters - a full bailout would look like a climbdown. But the EU is making its choice. If Ireland is rescued, Merkel and other EU leaders will have calculated that the periphery and the euro project must be saved - at all costs.