European finance ministers have signed off on a $113 billion rescue package for Ireland with the question of whether it will be enough still open. It is the second such rescue of a European nation after the $150 billion aid package created for Greece last May. Part of the money for the program will be provided by the IMF.
It may not be the last bailout in the region. There is a great deal of speculation that the borrowing costs of Portugal and Spain are so high that they will need tens of billions of dollars in assistance. These sums, together with Ireland and Greece, may tax the nearly $1 trillion facility put in place by the IMF and EU for rescues.
Whether the Ireland package is large enough will be based on three things. The first is whether the deficits at Ireland’s banks will grow beyond their current levels which were created by bad loans and a falling real estate market. The next is whether the Ireland austerity package and new taxes will be regressive and will drive the nation further into recession by raising unemployment. This would widen the deficit further.
The last problem is one the rescue cannot address. The Irish people have turned from sullen to mutinous as they watch social programs cut and worry about the probability of higher taxes. The ruling Fianna Fail party will almost certainly be thrown out of office early next year and replaced by Fine Gael and Labour. The new majority may well decide that it will not honor the new bailout agreement or will demand significant changes in terms, particularly the interest rate Ireland must pay on its loans. That interest rate is estimated at 5.8%, a huge burden for a government with a struggling economy.
And Ireland may find that it will have difficulty if it needs to raise more money in the future. EU statements about capital raised after 2013 say that private investors may have to share in any losses of sovereign debt. This may keep capital markets investors out of the market.
The rescue package, which will be in place next week, could be partially undone early next year.
Douglas A. McIntyre
Statement from EU financial directors:
“Ministers unanimously agreed today to grant financial assistance in response to the Irish authorities’ request on 22 November 2010. Ministers concur with the Commission and the ECB that providing a loan to Ireland is warranted to safeguard financial stability in the euro area and the EU as a whole.
“Euro-area and EU financial support will be provided on the basis of a programme which has been negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB.
“Ministers welcome the staff-level agreement on a three year joint EU/IMF financial assistance programme for Ireland. The Irish Government approved the programme on 28 November. Ministers unanimously endorse the measures announced today.
“Building on the strong fundamentals of the Irish economy, the programme rests on three pillars: – An immediate strengthening and comprehensive overhaul of the banking system – An ambitious fiscal adjustment to restore fiscal sustainability, including through the correction of the excessive deficit by 2015 – Growth enhancing reforms, in particular on the labour market, to allow a return to a robust and sustainable growth, safeguarding the economic and social position of its citizens.
“The financial package of the programme will cover financing needs up to 85 billion euros, including 10 billion euros for immediate recapitalisation measures, 25 billion euros on a contingency basis for banking system supports and 50 billion euros covering budget financing needs. Half of the banking support measures (17.5 billion euros) will be financed by an Irish contribution through the Treasury cash buffer and investments of the National Pension Reserve Fund.
“The remainder of the overall package should be shared equally amongst: (i) the European Financial Stabilisation Mechanism (EFSM), (ii) the European Financial Stability Facility (EFSF) together with bilateral loans from the UK, Denmark and Sweden, and (iii) the IMF (22.5 billion euros each).
“The main elements of policy conditionality, as endorsed today, will be enshrined in Eurogroup and Council Decisions to be formally adopted on 6 and 7 December. The Eurogroup will rapidly examine the necessity of aligning the maturities of the financing for Greece to that of Ireland.”
Annex : Distribution of the Loan to Ireland Total Programme Volume (Billions of euro) Contribution by Ireland 17.5 External support 67.5 Total 85.0 External Support Breakdown IMF (One-Third)* 22.5 Europe (Two-Thirds) 45.0 Total 67.5 European Breakdown EFSM 22.5 EFSF (Plus Bilaterals) 22.5 Total 45.0 EFSF (Plus Bilaterals) Breakdown EFSF (Effective) euro area 17.7 United Kingdom 3.8 Sweden 0.6 Denmark 0.4 Total 22.5 *Subject to the IMF Board’s approval
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