The most necessary of bailouts was agreed last night as the Irish Republic accepts a loan deal worth 85 billion euros. As Prime Minister Brian Cowen stated yesterday it provides “vital time and space to successfully and conclusively address the problems we’ve been dealing with since the global financial crisis began”. This week will indicate whether the markets feel the same.
The deal has a lower-than-anticipated average interest rate of 5.8% with 35 billion euros dedicated to bailing out the banks who were under-capitalised in an over-leveraged system and whose deficit was too great for a full state bailout.
It is a hotchpotch of lenders – the EU will contribute 45 billion euros (which includes direct loans from the UK and Sweden) and the IMF will contribute just under 23 billion euros.
A loan is most definitely needed given the current situation. What Ireland needs is a strong government which will impose tough measures to sure up the accounts thus allaying financial market concerns – what it doesn’t need is the junior coalition partner completely pulling out of government thus forcing a general election early next year. Yes, the current government has failed and in due course will be punished, but now is the time to (politically) pull together.
Many in the UK would ask why Britain has gotten involved in a eurozone issue. Here the argument makes perfect sense – the UK, which includes Northern Ireland, is a major trading partner of Ireland and a failed Irish economy will harm the economy.
This obviously raises questions about the eurozone area and the euro. Is this a bailout for the Irish people or for the euro?
The common currency European dream doesn’t seem as good in real-life. A common monetary policy is difficult enough to harmonise with differing rates of inflation, investment needs and economic issues. However, combined with a differentiated fiscal policy it has led to disaster. The next logical step would be to have a common fiscal policy or to impose strict conditions on loans. Both Greece and Ireland have imposed strict fiscal austerity measures to sure up the finances which, in effect, is the same as a common fiscal policy in the short run.
These are tough times for the Irish population – huge cuts, pensions slashed and salaries reined in – and they don’t feel this is a fair measure. What matters to the people and indeed the Irish economy is how Ireland grows to service the debt and build capital reserves. Jobs, jobs and more jobs need to be created in an export led recovery and it is imperative not to lose young talent to emigration. If the Celtic Tiger can roar once more then the markets will show their confidence in the form of investment and Ireland can get out of trouble.
Similar to most issues within economics, only time will tell if this measure is sufficient. If yields for Irish bonds decrease then this will show a key show of confidence from the markets and will enable further lower-rate capital to be raised. If the markets remain scared and the euro falls then we may well see further loans given to Ireland.