Will Ireland take its medicine? Karen Maley Published 7:48 AM, 22 Nov 2010 Last update 10:30 AM, 22 Nov 2010
Financial markets are likely to breathe slightly easier this morning after eurozone finance ministers overnight gave their blessing to Irelands request for a multi-billion euro rescue.
According to the French newspaper Le Monde, the eurozone ministers gave the green light in principle, allowing Ireland to access the special $1 trillion rescue package established by the European Union and the IMF last May to help debt-laden eurozone economies.
This financial assistance is expected to be supplemented with bilateral loans from the United Kingdom and Sweden, which are not members of the eurozone.
No size has been put on the Irish bail-out yet, but it is expected to be at least 50 billion ($68 billion).
Yesterday, the Irish finance minister, Brian Lenihan, said he would recommend the Irish government formally apply for an aid package from the European Union and the International Monetary Fund at a special cabinet meeting later in the day. Speaking on Irish radio, he said Irelands economy had been overwhelmed by the size of the losses incurred by the countrys banks. The banks were too big a problem for the country, I accept that, he said.
The Irish cabinet was expected to finalise new austerity measures yesterday, which are aimed at cutting the countrys budget deficit by 15 billion ($US20 billion) over four years, or close to 10 per cent of Irelands annual GDP. The aim is to cut Irelands record deficit, which has blown out to 32 per cent of GDP as a result of the costs of bailing out the Irish banks, back to 3 per cent.
If the cabinet approves the new austerity measures which are expected to involve voluntary redundancies in the public sector, reductions in tax relief for pensioners, the introduction of water charges, and cuts in the Irish minimum wage they could be announced later today.
But the 160-page plan for turning around the countrys finances will also require approval of experts from the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB), who have been in Dublin since last Thursday.
These experts are likely to recommend that, in exchange for receiving the EU-IMF bailout funds, Ireland should increase its corporate tax rate, which is currently an extremely low 12.5 per cent.
On Saturday, French President Nicolas Sarkozy said he imagined that Ireland would raise its corporate tax rate.
He said that although it was not a condition for activating EU assistance, "it's obvious that when confronted with a situation like this, there are two levers to use: spending and revenues".
He added: "I cannot imagine that our Irish friends, in full sovereignty, (would not use) this because they have a greater margin for manoeuvre than others, their taxes being lower than others."
Meanwhile, high-profile economist Nouriel Roubini told CNBC that a situation had now developed where super-sovereigns such as the IMF and the EU were having to bailout governments which found themselves with crippling debt loads as a result of bailing out their banks.
He said the move by the super-sovereigns to underwrite government debt was only increasing the scale and concentrating the problem of excessive debt.
Ultimately, he said, debt needed to be restructured. At some point you need the creditors of the banks to take a hit otherwise you put all this debt on the balance sheet of government. And then you break the back of government and then government is insolvent."
Roubini, who is an Economics Professor at New York University, predicted that Portugal would be the next eurozone country to hit problems. "Due to the severity of Portuguese debt problems, Portugal is going to lose market access and that means they are going to require IMF support as well.
But, he said, the real nightmare domino was Spain.
"You can try to ring-fence Spain. And you can essentially try to provide financing officially to Ireland, Portugal, and Greece for three years. Leave them out of the market. Maybe restructure their debt down the line.
"But if Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side and also too big to be bailed out."
For problems of that magnitude, he said, there were simply not enough resources governmental or super-sovereign to go around.
