Ireland’s Bailout Plan Aims to Ease Broader Economic Crisis

BY Larisa Epatko  November 22, 2010 at 12:58 PM EDT


Protest in front of Irish prime minister’s office in Dublin on Monday (Peter Muhly/AFP/Getty Images)

Ireland, the European Union and International Monetary Fund agreed over the weekend to an 80 billion to 90 billion euro ($109 billion to $123 billion) financial bailout plan to help Ireland’s ailing economy and prevent the broader economic crisis from tanking other troubled countries, such as Portugal and Spain.

The deal, which reportedly includes a three-year loan and 15 billion euro ($20.5 billion) plan for budget cuts, came after Ireland resisted the outside help for a week.

We turned to Brian Beary, Washington correspondent for Europolitics, for some insight:

What triggered Ireland’s turnabout after resisting help at first?

BRIAN BEARY: The immediate trigger was the increase in the cost of borrowing from the markets that the Irish government has been faced with in recent weeks. Currently, the government has to pay an 8-9 percent interest rate because of the market’s growing lack of confidence in Ireland’s ability to pay back its debt.

In addition, Germany and France have been increasing the pressure on Ireland to apply for the EU-IMF bailout mechanism, keen to bolster the overall stability of the euro.

How will the bailout plan help Ireland?

BRIAN BEARY: The immediate impact is to reduce the rate of interest rate that the Irish government pays on money it borrows: from 8-9 percent to about 5 percent. Ireland will have to borrow tens of billions of euros in order to prevent the collapse of its banking sector and lower interest rates will help it to do this.

What is Ireland expected to do under the plan?

BRIAN BEARY: The government’s top priority is to re-structure its banking sector — both on the management and ownership side. Over the past two years, the Irish government has effectively been forced to take over the main Irish banks to save them from collapse. It now owns 100 percent of Anglo-Irish bank (the bank in most trouble), over 90 percent of AIB, and 36 percent of Bank of Ireland. It is expected to gradually wind down Anglo-Irish and sell off AIB, all the while protecting depositors from financial loss.

The second priority will be to implement its four-year austerity plan that aims to reduce Ireland’s budget deficit from 32 percent of GDP to 3 percent of GDP by 2014, in line with the deficit requirements for all euro-zone countries.

How are the Irish reacting to the country’s economic troubles and bailout plan?

BRIAN BEARY: The political parties, while heavily critical of the government — a Fianna Fail/Green Party coalition — broadly acknowledge the need to resort to EU-IMF help. One notable exception is Sinn Fein, formerly the political wing of the IRA, which is deeply hostile to any EU or IMF involvement, and is trying to organize protests against it.

The government will present its 2011 budget on Dec. 7. It is likely to get the budget passed. Opposition parties will be reluctant to block it entirely, despite the severity of the impending spending cuts, as this would cause a negative public backlash. The Irish people generally appreciate that there is a crisis and that urgent, drastic steps need to be taken.

Fianna Fail’s minority coalition partners, the Green Party, announced today they are pulling out of government. An election is expected to be called for late January or early February. Fianna Fail is expected to change its leader as Prime Minister Brian Cowen is widely perceived as having managed the crisis poorly.

More generally, the Irish public and media are furious with the property developers, bankers, politicians and regulators who helped bring this situation about because of their reckless behavior in the 1990s and 2000s.

How will Ireland’s rescue plan help the economic crisis from spreading to Portugal and Spain as governments hope?

BRIAN BEARY: The Irish rescue plan has no direct impact on the Portuguese and Spanish situations. However, one can speculate that the markets may feel more reassured about the euro-zone’s stability generally now that they see the drastic reforms the Irish government is willing to take, and the solidarity that its EU partners and IMF are showing to help it implement those reforms in order to keep the Irish economy afloat.

Are there any other major points to consider?

BRIAN BEARY: The crisis with the entire euro-zone in 2010 has triggered a wider debate about how wise it was for the EU to adopt a single currency, given that its member states’ economies are so divergent in the cycles they follow and the fact that their fiscal policies are not harmonized. For example, it was Germany that in the 1990s pushed the European Central Bank to adopt lower interest rates, which may have helped the German economy but also contributed to a lending and property boom and bust in peripheral EU economies like Portugal, Ireland, Greece and Spain — the so-called PIGS.

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