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EU, IMF Back Ireland's Request For Financial Bailout

Irish Prime Minister Brian Cowen says the Irish government has applied for aid from the EU and IMF
European and International Monetary Fund (IMF) officials are working out details of a financial aid package for Ireland after Dublin appealed for a massive loan to shore up its troubled banking sector and budget deficit.

European Union finance ministers quickly agreed to the bailout, saying late on November 21, that the use of up to 100 billion euros ($137 billion) from an EU-IMF loan fund was "warranted to safeguard financial stability" in the European Union and countries in the euro currency zone.

The European Central Bank said the aid would be provided under strong policy conditions negotiated in Dublin by officials from the EU and the IMF during the past week.

Irish Prime Minister Brian Cowan said some of those conditions focus on Ireland's private banks, which have been heavily supported by Ireland's state budget since they suffered massive losses from the crash of property values amid the global economic crisis.

"Put simply, the Irish banks will become significantly smaller than they have been in the past so that they can gradually be brought to stand on their own two feet once more," Cowen explained. "The second key element of the agreement will be a program to reduce our budget deficit. Again, put simply, the government has to increase our taxes and reduce our spending to levels we can afford."

Checking The Crisis

Other eurozone countries fear that if Dublin were to default on its debts, the value of the euro would plummet. European officials hope the bailout package will stabilize soaring debt costs for Ireland on the financial markets and prevent investors from losing confidence in other eurozone countries with large budget deficits -- notably Portugal and Spain, as well as Greece and Italy.

EU President Herman Van Rompuy has warned that the future of the common euro currency, as well as the future of the 27-nation European Union itself, could be at stake.

There also are global implications to Ireland's crisis. Ministers from G7 countries spoke in an emergency conference call on November 21 about the Irish bailout proposal, which they deem necessary to prevent the crisis from infecting the wider global financial system.

But some economic analysts warn the austerity measures that are a precondition for the EU-IMF bailout loans are not the right way to put in order the public finances of troubled eurozone economies in the long term.

Among those critics is Simon Tilford, the chief economist at the London-based Center for European Reform, who says that the underlying reason for the crisis is that certain EU economies are based on "very, very weak public finances" and have "lost trade competitiveness relative to other members of that currency unit."

"[As eurozone members], they can't devalue their currencies in an effort to generate some export-led economic growth. So what they essentially have to do is cut their costs within the eurozone. But by cutting their costs -- cutting government spending and cutting wages -- they are further undermining domestic demand," which, Tilford says, "weakens their public finances."

Tilford says Dublin is now in a very difficult position because it has become constrained by its lack of policy autonomy since joining the common euro currency

Generally, Tilford says, countries like Ireland, Greece, and Portugal that are attempting a large fiscal adjustment would also markedly devalue their currency, "the normal IMF prescription for countries in similar positions."

"The underlying reason why there are fiscal problems in these member states of the eurozone is that their prospects for economic growth have collapsed," Tilford explains. "Unless their economies can be put back on a decent growth path, they will be unable to put their public finances on a sound footing irrespective of how much fiscal austerity they impose."

The EU's Footing

But Ireland's Finance Minister Brian Lenihan said that was not the case for Ireland. He argued that Ireland's growth prospects were on sound footing due to a "6 percent increase in exports year-on-year this year." Lenihan estimated that Ireland's balance payments "will move into surplus next year."

Prime Minister Cowan also defended the decision as being "taken in the national interest," in response to critics who say the imposition of austerity measures by Dublin is being done to benefit the eurozone as a whole rather than Ireland's own growth prospects.

Even as Ireland seeks bailout loans, financial analysts say Spain and Portugal remain on course for potential bailouts of their own. Spain now has Europe's highest unemployment rate, and many investors see Portugal as doing too little to restructure an uncompetitive economy.

Economists question whether the economies of Portugal, Spain, and Greece -- and possibly Italy -- will grow enough to build their tax bases and permit them to keep paying the interest on their debts.

Ireland's bailout request comes just six months after the EU and IMF organized a 110 billion-euro ($151 billion) bailout of Greece and declared a 750 billion-euro ($1 trillion) safety net for any other eurozone members facing the risk of imminent loan defaults.

written by Ron Synovitz with agency reports
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