Europe declared on Monday that a decisive action to save the euro had been taken by forging an agreement on a bailout package for Ireland and devising the foundations of a permanent debt resolution system from mid-2013.
German Finance Minister Wolfgang Schaeuble said now that clarity had been achieved, “we are hoping for calm and reality in the financial markets,” where he said speculation against euro zone countries was “hardly rational.” That investors are in fact convinced by the latest moves however remains in doubt.
The details of the Irish aid were made public late on Sunday. The package, worth 85 billion euros, is a complex one, arrived at after two weeks of often contentious negotiations between Dublin and Brussels, the headquarters of the European Union. It includes funds from four sources: The 16-country euro zone in the form of the European Financial Stability Fund (EFSF), the full 27-member European Union (EU), the International Monetary Fund and Ireland itself. While EU, IMF and EFSF each committed 22.5 billion euros, Ireland will provide 17.5 billion euros of the overall sum from its own reserves, including previously off-limits pension reserves.
Ten billion euros will be immediately made available to Ireland to boost the capital reserves of its state-backed banks, whose bad loans have so far been picked up by the Irish government, precipitating the current crisis. Another 25 billion euros will remain in reserve, to be used for the banking sector. The rest of the loans will be used to cover government deficits for the coming four years.
The interest rate is also an amalgam, set at 6.05 per cent from the euro zone fund, 5.7 per cent from the EU fund and 5.7 per cent from IMF. Over all the rate is higher than the 5.2 per cent being paid by Greece on the bailout it received in May.
However, the repayment terms are more generous than those made available to Athens. The Irish loans will stretch over 10 years: Three years without repayment, followed by repayments over about seven years. Euro zone finance ministers have said they may consider extending Greece’s repayment period to match these terms.
In Ireland, the package has been attacked by the opposition as punitive and short sighted, necessitating the kind of austerity that will stymie the country’s economic growth making it impossible to repay the debt it is incurring.
Analysts also remain sceptical that Ireland’s bailout will be sufficient to soothe markets and stem contagion, with many believing that a rescue for the euro zone’s other fiscally weak economies, in particular Portugal, is almost inevitable at this point.
The gravest worries are however centred on Spain, the last of the unflatteringly named PIGS (Portugal, Ireland, Greece, Spain) quartet. It is widely believed that should push come to shove, the 750-billion euro EFSF may not have enough funds to support Spain, whose economy is the world’s ninth largest and nearly twice the size of those of Portugal, Ireland and Greece combined.
When European leaders first decided last month to create a “permanent crisis resolution mechanism,” for the post-2013 period (when the current EFSF expires), they also floated the idea that bond-holders would have to suck up some of the fiscal pain, since Germany was adamant that the burden of helping countries in crisis could not fall solely on the taxpayer.
However, fearing the imposition of “haircuts” (a reduction in the value of bonds), investors dumped the debt of the most vulnerable countries, notably Ireland and Portugal, in turn fuelling alarm of further contagion.
