Ireland applies for €90bn bail-out as eurozone trembles
The Irish government has applied for an EU-IMF bail-out of up to €90 billion to save its banking sector from collapse and reduce its borrowing costs, a move that in effect places Irish democracy, like that of Greece, under the protectorship of experts from Brussels and Washington.
Ireland's finance minister, Brian Lenihan, made the announcement speaking to public radio on Sunday evening (21 November) that he would recommend the application to a cabinet meeting later that night. The taoiseach, the country's prime minister, Brian Cowen, publicly addressed his nation, admitting to what had been denied for a week.
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In a bitter exchange with an Irish reporter, the leader rejected responsibility for the crisis: "I will defend my position throughout my political career. I don't accept your contention that I am the bogeyman you are looking for."
European Union finance ministers on Sunday night gave the nod to the loan, following feverish negotiations between the Irish government and a team of experts from the troika of the EU, the ECB and the IMF, flown into Dublin on Thursday, although exact sums have yet to be announced, following an emergency meeting held at the same time as the Irish cabinet discussion.
EU economic affairs commissioner Olli Rehn, conceded that the emergency action was taken essentially to protect the eurozone from further contagion: "Providing assistance to Ireland is warranted to safeguard the financial stability in Europe"
Eyes will now be cast toward Portugal, also in recent days bludgeoned lending costs demanded by investors, to see if the Irish move will be enough to prevent a runaway chain of bail-outs that potentially could include Spain at a massive cost.
Underscoring the acute danger to the eurozone and the wider global economy posed by the relatively small Irish economy, G7 leaders also gave the green light to the deal.
The UK and Sweden, who both lie outside the wounded eurozone, will also offer a set of bilateral loans.
Britain – whose own banks have the largest exposure to Ireland, an estimated £150 billion – is likely to be on the hook for around £7 billion, including its participation in the bail-out via the IMF and the EU. However, some sources suggested that a combined bilateral package including other sources could add an additional €20 billion to the estimated €70-90 billion bail-out fund.
An Irish default would have left London in a similar situation that Ireland currently faces, with public funds drained to prop up foundering banks.
Irish leaders refused to be drawn on the exact numbers involved, although Mr Lenihan insisted it was not "a three-figure sum", as had been reported by some media.
Precise details of the scale of the three-year loan - what Irish leaders are preferring to a ‘contingency fund' - and the stiff conditions attached to it, will trickle out in the coming days as formal talks between the troika and the Dublin government now begin in earnest. It is expected that a final package will be agreed by the end of the month.
What is known is that the loan conditions comprise two broad elements. The first, a deep restructuring of the banks, will see the financial institutions, in the words of Mr Cowen "significantly smaller than they were in the past."
The second element will attempt an "internal devaluation" - a bundle of steep public spending cuts, increased taxes that squeezes labour costs. Tied to the euro, Ireland is unable to devalue, imposing such dramatic social pain it is hoped will allow the economy can regain its international competitiveness.
And dramatic it will be: a government four-year plan of cuts will include, according to the taoiseach, €10 billion in cuts, including a 10 percent cut in welfare provision and a reduction in public sector jobs of 28,000, and €5 billion in new taxes, including increased taxes on low-income earners and water charges.
Ensuring the Irish government sticks to its plan, experts from the troika, currently lodged at Dublin's luxurious, five-star Merrion Hotel, will likely be installed in the finance ministry, with quarterly reviews, as occurs in the case of Greece's bail-out. Failure to meet projections will require a ratcheting up of the austerity.
Mr Lenihan refused to mention the expected interest rate imposed on the loan, but the standard figure, which could open up other EU states to charges of attempting to profit from Ireland's misfortune, comprises an ECB rate of one percent, plus an additional 1.5 to two percent on top, with one percent ‘handling fee', amounting to roughly or just below five percent.
The opposition Fine Gael has said it will back any budget proposed by the government, while Labour's Pat Rabbitte, speaking on Irish public television on Sunday night, would not comment on whether his party would do so.
Protests against the measures so far have been miniscule, with a few dozen outside government offices on Sunday night, although a major demonstration has been called by unions for 27 November.