November 22, 2010

Ireland’s Acceptance of Bailout Fails to Impress Markets

Agreement to be finalized as EU tries to ward off contagion

Although Ireland formally accepted the need for a bailout, requesting help from the European Union (EU) and International Monetary Fund (IMF) on Sunday, the world markets failed to be impressed on Monday.

In the U.S., stock futures dropped in early trading—particularly those of Allied Irish Banks Plc (AIB.N) and Bank of Ireland (IRE.N)—and the Dow and S&P ended the day down slightly. European markets fell across the board, and the two Irish banks saw losses of 16.1% (Bank of Ireland) and 1.6% (Allied Irish). The euro lost 0.4% against the dollar, amid worries of contagion and fears that Portugal would be the next country in need of rescue, according to Reuters.

Moody’s said that there might be a “multi-notch downgrade” in Ireland’s credit rating as a result of the bailout, according to The New York Times. The country’s Aa2 rating was put on negative outlook last month.

When the original announcement was made, Irish Prime Minister Brian Cowen said, “The European authorities have agreed to our request. I expect that agreement to be finalized shortly, within the next few weeks.” The request was made under the European Financial Stability Facility (EFSF).

While the size of the package is not yet decided, it is expected to be between 80-90 billion euros, a smaller amount than the 110-billion-euro package Greecereceived in April. Britain will contribute about 7 billion pounds, even though it is not part of the euro zone.

Olli Rehn, economic and monetary affairs commissioner, said that EU, European Central Bank (ECB) and IMF experts would develop a three-year package of loans by the end of November. “Providing assistance to Ireland is warranted to safeguard the financial stability in Europe,” he said. “The program under preparation will address both the fiscal challenges of the Irish economy and the potential future capital needs of the banking sector in a decisive manner.”

EU finance ministers issued a statement in the wake of the request that said in part: “Ministers welcome the request of the Irish Government for financial assistance from the European Union and euro-area Member States. Ministers concur with the Commission and the ECB that providing assistance to Ireland is warranted to safeguard financial stability in the EU and in the euro area.”

Even as details were being worked on in the bailout deal, Ireland’s political situation deteriorated, with calls for an immediate election from the opposition and withdrawal of support for the budget and bailout package from government allies. If the deficit-cutting budget already planned for 2011 does not pass, the whole rescue package may not happen.

Brian Lenihan, Irish finance minister, said that Ireland’s banks would likely be restructured. However, he insisted that the low corporate tax that has been so much a bone of contention would remain untouched. In a news conference, Lenihan said that in the end the banks would likely be significantly smaller, and might sell non-core assets as well. But in the wake of public anger at the austerity program and calls from the opposition for an immediate dissolution of parliament, all that is now in doubt. Without a working majority in the government, the likelihood of passage is scant.

The Green Party, Prime Minister Brian Cowen’s coalition partner, at first had said it would support the government until passage of the budget and implementation of the rescue, but now has quit the coalition and called for January elections. The four-year plan from the current government, scheduled to be announced on Wednesday, would cut 10 billion euros from public spending and raise 5 billion euros in tax increases. This follows two years of austerity that have led to labor demonstrations and student uprisings.

Portugalis thought to be the next country in line for financial assistance. A Saturday report from Reuters indicated that Jose Socrates, prime minister of the troubled nation, might replace a number of officials within the government. However, there was speculation that he might find it difficult to replace Fernando Teixeira dos Santos, the country’s finance minister, in the midst of its crisis.

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