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After Bailout for Irish, Questions Linger Over Portugal, Spain

November 22, 2010 at 5:45 PM EST
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After a report from the business editor of The Irish Independent, Maeve Dineen, Jeffrey Brown gets two views on the potential political impact of Ireland's bailout with economist Jacob Kirkegaard and George Washington University professor Scheherazade Rehman.
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JEFFREY BROWN: A short time ago, I spoke to Maeve Dineen, business editor of the Irish Independent newspaper from Dublin.

Maeve Dineen, welcome. So, why did the Irish government suddenly seek the bailout, after insisting, even in the last few days, that it wasn’t necessary?

MAEVE DINEEN, Irish Independent: Well, we had a dramatic turn of events over the weekend, where our prime minister came out and finally admitted that the country will need a bailout.

This seems to center around our banking problem. And the banks, it emerged, are now too big of a problem for this country to deal with on their own, because there are such high losses throughout our entire banking system, that the country simply cannot deal with them and will not be able to pay for them.

JEFFREY BROWN: Was that a surprise, because, even a few days ago, the prime minister said a bailout wouldn’t occur?

MAEVE DINEEN: Sure. He was, we believe, hoping to come forward with a counterproposal that would mean that he would be able to deal with the banks themselves or we as a nation could deal with the banks, and that we wouldn’t need to go to Europe for a bailout.

As you can imagine, this isn’t something that, as a nation, we want to do. And he was fighting tooth-and-nail not to have to approach this. But, at the weekend, there seemed to be somewhat of a capitulation, where he was either forced by his E.U. counterparts and forced by the threat of problems that are in our banks, after the IMF and the E.U. arrived in the country to go through the banks’ books, and he was forced to ask for the bailout.

JEFFREY BROWN: And this has led to a political crisis there, right, with the prime minister seemingly fighting for his life. Where do things stand today?

MAEVE DINEEN: Sure. Well, currently, as we speak, the prime minister came out tonight, just a little over an hour ago, and said that he will go and dissolve the Dail, which will dissolve our Parliament, and go run for an election again in January. So, he pretty much has — his days are numbered. He’s come out and said it: I will try and push through budget that we want to go on for next week.

And, after that, he will go and run for reelection and call an election for January.

JEFFREY BROWN: Now, that budget you just referred to is going to be a very tough austerity budget. You have had these austerity measures there for several years now. What’s coming, and how big a problem is all this for the Irish economy?

MAEVE DINEEN: Yes, it’s not looking good for the next number of years, I’m afraid. Wednesday, the day after tomorrow, we’re hoping that the government will come out with what is called a super budget. So, it’s a four-year plan which they will outline 15 billion euro of cuts and taxes that will be taken out of the economy over the next four years.

JEFFREY BROWN: And explain for us how and who this hits. How is Irish society, its businesses and workers, how are they all affected?

MAEVE DINEEN: Absolutely. This is going to hit people right from the very top right down to the very bottom.

When you’re looking at 15 billion over four years, which is essentially 10 percent of the economic growth of this country, you’re — you’re — nobody is going to be left untouched by this. You’re talking taxes, increased tax bands, which will bring in those who earn very little into the tax band. It means that those who earn an awful lot at the very top, they will be paying more.

And middle-income Ireland, they will probably get caught the worst, because child benefits will be cut. Pensions will be cut. Social welfare will be cut. It’s not going to be pretty.

JEFFREY BROWN: And what about the nation’s psyche? Just a few years ago, Ireland was being held up as the so-called Celtic tiger, with the booming economy, brimming confidence and optimism. What’s happened now? What do you see around you?

MAEVE DINEEN: Oh, things — things have just turned full circle. It’s — the Celtic tiger, unfortunately, is well and truly dead at this stage. There are a lot of for-sale signs. People are trying to sell their homes. Immigration is increasing.

The numbers unemployed, that is increasing. There’s a lot of concern. And people are very worried. They’re waiting for this budget to come out, until we see exactly where we stand. But there’s an awful lot of concern there at the moment.

JEFFREY BROWN: And is the depth of the crisis in the banking system even now understood? Is it clear what needs to happen or what will happen with the banks?

MAEVE DINEEN: No. Unfortunately, it’s not, because, like you said, up until the weekend, the government were denying there was any need for a bailout.

Then, over the weekend, it emerged that our banking crisis was too big for us to deal with, that it became too big an issue for our country alone. So, everybody is wondering, well, what is the issue? Where are the big holes in our banks?

So, as we speak, the IMF and European Commission are here. And they’re going through the bank books. And they’re pinpointing what spots we must look at and where exactly are the holes. There is a large concern that the next crisis will surround mortgages and people who are unable to pay their mortgages.

JEFFREY BROWN: And speaking of the next crisis finally I mean of course a lot of this is tied to a fear of contagion going beyong Ireland. How does it play out there in Dublin as you all look to Portugal to Spain to other countries in Europe?

MAEVE DINEEN: Sure. We’re not alone on this.

This is either the joy or the problem of being part of the Euro Zone. We’re yet to see what that is. Obviously, Ireland is bailed out now. Greece was bailed out a couple of months ago. Concern is now and focus is now shifting to Portugal and Spain, whether they will be the next person — next group of countries that will be under the focus of the bond markets and the borrowing markets.

JEFFREY BROWN: Maeve Dineen of the Irish Independent, thank you very much.

MAEVE DINEEN: Thank you.

JEFFREY BROWN: And for a broader look at the potential fallout from the Irish crisis here and globally, I’m joined now by Jacob Kirkegaard, an economist and research fellow at the Peterson Institute for International Economics, and Scheherazade Rehman, director of the European Union Research Center and professor of international finance at George Washington University. Welcome to both of you.

Scheherazade, help us understand Ireland’s situation. In what ways is it similar or different to what we have seen in other countries in the last couple years?

SCHEHERAZADE REHMAN, director, European Union Research Center: Well, I think there’s a lot of similarities in terms of what is going — what happened with Greece in May. And, essentially, the European leadership has failed us again.

The Irish economic problem is different than what happened in Greece. Greece, public finances are a disaster. In Ireland, it’s really a weakened banking sector, which is a fallout from the housing market crash. So, they are two very, very different problems.

But this is a crisis of fear. And, in the fear, all the countries look alike. And the European leadership has forgotten that in this type of crisis, clear-cut, crisp action is required. And they have done the same thing again they did last spring. They denied. They delayed. And now they’re going to have to throw more money at the problem. And the problem is just compounding itself.

JEFFREY BROWN: What’s your analysis of what we have just seen?

JACOB KIRKEGAARD, Peter G. Peterson Institute for International Economics: No, I mean, I would largely agree with what we just heard, that there is a very different situation. I mean, Ireland clearly sort of exemplifies that you can do everything right, but, if you get your banking system wrong, then you’re going to end up in the same situation as Greece was in.

But I don’t actually think that it’s fair to say that the European Union leadership has failed us again, because, if we look at the timeliness of this package, it came much sooner than the one we saw in Greece. And, therefore, there is a chance that, yes, there will be money thrown at the problem. And it doesn’t solve necessarily in the first order the ultimate solvency issue of Ireland’s banks and its own government.

But it does, I would believe, go some way along to contain the contagion through the European banking system.

JEFFREY BROWN: Well, how does one judge the success or failure of this action, the bailout?

JACOB KIRKEGAARD: Well, if we start to see the same kind of silent bank run that we have actually seen in Ireland, which is also maybe what has caused this crisis, with large depositors, corporate depositors, leaving other European banks because of the fear that these banks are exposed to Ireland, if we start seeing that in Spain, in Italy, in Germany, in France, then we will know we will have failed.

But I will contend that, so far, we haven’t seen that. And I don’t believe that we will see that.

JEFFREY BROWN: What are you watching for to know? You’re saying the E.U. came to this late, but now what? Now what do we watch for?

SCHEHERAZADE REHMAN: Portugal.

JEFFREY BROWN: Portugal?

SCHEHERAZADE REHMAN: We watch Portugal to see if this bailout actually works, because the whole point now is to stem the infection.

JEFFREY BROWN: And? I mean, and so we wait to see if it spreads to Portugal?

SCHEHERAZADE REHMAN: And if it spreads to Portugal, then the danger — the real dangers will be Spain, and because Spain is really too big to fail here. And…

JEFFREY BROWN: Before we continue on with Europe, let me ask about the U.S., because people are watching here. Are there implications for us? Why do we care about what’s going on there?

SCHEHERAZADE REHMAN: Well, I think twofold.

One, Europe is — the European Union is the largest trading bloc in the world. And, clearly, Obama administration wants to double its exports. This is a major trading partner. We don’t want to see a weak, anemic Europe.

And, secondly as a byproduct, when Europe falls, the dollar gets stronger. And this again hits us in terms of us wanting to double our exports in the next few years.

JEFFREY BROWN: What do you see for the implications for the United States?

JACOB KIRKEGAARD: Well, I think there are non-trivial exposures of the U.S. financial system itself to Ireland. I mean, the numbers…

JEFFREY BROWN: The banking system.

JACOB KIRKEGAARD: The banking system. There are about $60 billion in direct exposures, according to the BIS data on these issues.

But, at the same time, the real fear here is that Ireland will trigger a — the sort of systemic banking crisis in Europe that will ultimately engulf the entire global financial system, and obviously also the one in the United States.

JEFFREY BROWN: The entire global financial system?

JACOB KIRKEGAARD: Yes. If the — if this becomes a systemic banking crisis in Europe, which I believe is not going to happen, but you cannot rule it out, yes, then — then that is what we’re talking about.

JEFFREY BROWN: Well, you were about to — you were about to talk about Portugal and Spain. I mean, what — I mean, when you look at the potential for contagion, you look at Portugal and Spain?

JACOB KIRKEGAARD: Yes. I mean, certainly, I look at Portugal, because this is a country where you have to ask, given the very poor growth record that this country has had over the last decade, I mean, even before the economic crisis, it’s not clear that Portugal at this level can sustain its current debt level.

But at the same time, I think, I don’t quite frankly worry so much about Portugal, because Portugal will get the same kind of — or can get the same kind of a financial assistance, in my opinion, without many problems from the European Union and the IMF. There is — quote, unquote — “enough money” there.

The real issue is whether or not Spain is the next target, so to speak, by the financial market and if contagion spreads to Spain as well. So, what we have got to ask ourselves is, is the circumstances and the events in Greece, Ireland, and Portugal going to make it more or less likely that Spain gets into the same situation?

And I think, if you look at the actual actions that are taken by Spanish government, the kind of reforms that they have implemented, preemptively, so to speak, I think you have to conclude that that — the situations in the smaller countries make it less likely that Spain gets into this situation.

JEFFREY BROWN: Are you that sanguine, hopeful?

SCHEHERAZADE REHMAN: I’m a little more pessimistic.

I think there’s a basic problem going on here. The financial markets have somehow got it in their heads that, if there’s no austerity programs in all of Europe, those countries are going to be weak and they should be attacked.

The problem is, austerity programs in the short run shrink an economy. And if there’s no growth, there’s no recovery. And, so, it’s a contradictory situation going on right now in terms of what’s going to happen down the road.

JEFFREY BROWN: You know, we were all — we talked about this when Greece got its bailout.

SCHEHERAZADE REHMAN: That’s right.

JEFFREY BROWN: Does all of this raise questions about the survival of the euro?

SCHEHERAZADE REHMAN: No.

JEFFREY BROWN: Of the E.U.? I mean, is that…

SCHEHERAZADE REHMAN: No, no.

JEFFREY BROWN: No?

SCHEHERAZADE REHMAN: I don’t think that’s really an issue.

But I do think the Euro Zone and Europe in general is in for some very, very difficult times for the short run at least, and perhaps even the medium term.

JEFFREY BROWN: Meaning?

SCHEHERAZADE REHMAN: Meaning that — joblessness, slow, anemic growth.

And with austerity programs being the mantra of the day — and I don’t think it’s appropriate for all the countries. And I think, one day, the markets are going to wake up and saying, perhaps, you know, these huge budget cuts are not the most appropriate measures for some of these countries. Perhaps a stimulus is better at this stage and budget cuts down the road.

JEFFREY BROWN: That’s something like the debate we’re having in this country as well.

SCHEHERAZADE REHMAN: That’s exactly right. That’s exactly right.

JEFFREY BROWN: Now, do you see implications for the E.U., for the euro?

JACOB KIRKEGAARD: No, I don’t think any of this, what we see here, it doesn’t bring the — it doesn’t lead to the breakup of the euro, in my opinion, under any circumstances.

The short answer, to me at least, is that no democratic government will ever voluntarily leave the euro. And you can’t be excluded. You can’t be kicked out. So, essentially, what you have to ask yourself is, will it lead to a situation where one of these countries will have to default or restructure its debts, but it will happen inside the euro?

So, what you are looking at is a different type of Euro Zone, because the euro, as a political project, was always sold, if you like, as this great vision of a positive — you know, rising welfare levels, rising incomes, et cetera, convergence.

JEFFREY BROWN: Right.

JACOB KIRKEGAARD: So, everybody would become as rich as Luxembourg.

Well, that story is going to end. It’s going to be essentially a story that we are stuck with the euro, because we can’t afford to leave.

JEFFREY BROWN: Right.

JACOB KIRKEGAARD: So, it goes back to Machiavelli: better feared than loved.

JEFFREY BROWN: Well…

(LAUGHTER)

JEFFREY BROWN: Well, I mean, that — sold is the key word, I mean, going back 20 years or so, right?

But if you’re a citizen now in Germany or in one of the wealthier countries, and you’re looking at your hard-earned tax dollars going to bail out countries, is there a potential for a backlash there?

SCHEHERAZADE REHMAN: Clearly. Angela Merkel goes to elections in October 2013. And she’s going to have to face this again.

I think what you have got is a two-tier Europe. And this was not the idea initially. And there are the richer countries and the ones perceived to be weaker. And they’re going to pay a price for this.

JEFFREY BROWN: All right. Scheherazade Rehman, Jacob Kirkegaard, thank you both very much.

SCHEHERAZADE REHMAN: Thank you.

JACOB KIRKEGAARD: Pleasure.