Friday 19th Nov 2010
The Irish economic problems continue to evolve. As discussed yesterday there would be conditions to any EU 'bail-out' (loan). It seems that Germany and France are putting Ireland under pressure to raise their levels of Corporation Tax - this would in theory increase the levels of tax revenue and thus help restore Irelands economy to balance, however cynics would argue that the French and Germans wish this change so that Ireland becomes less competitive to foreign investment, a levelling of corporation tax rates across Europe would in this case help France and Germany. This provides a snapshot into why Ireland is resisting taking an EU loan. Remember though it's choices are limited - if it cannot afford to raise money by selling bonds (as the rate of interest is too high), then it has to reduce the need for borrowing (a slow and painful process of budget cuts) or take the 'bail out'...
Each day a new story regarding Ireland at the moment. You'll have seen the news on Ireland requesting loans of around 80-90bn Euro. Ireland requesting it?! They have enough money to pay their own way until June, but have been 'pursuaded' to request the money now.
ReplyDeleteContinued speculation of Ireland being unable to cope with it's debts was pushing up the debt replayment levels (Bond yeilds) of the other PIGS (Portugal, Greece & Spain (& Ireland)), so the Euro zone needed a quick resolution.
What is interesting is that in our current austerity the UK will be putting something like £9bn Euro into the pot - thats about £350 per family. More on that in a minute...
As you say, Ireland have been persuaded to take the bail out. If they do they would have to stick to the EU's rules which I guess wouldn't be ideal for any country. Could they turn down the loan or would the EU pretty much force them to take it due to the consequences it would have on the PIGS?
ReplyDeleteThanks for the comment!
ReplyDeleteFor sure they are under a lot of pressure from other European countries. Trouble also is that if they refuse the help now the continued uncertainty would keep bond yeilds high and they would have a real problem come June when they do say they need to get their hands on some more money. EU would be even more grumpy then! It is really an issue of perception; if Ireland could convince everyone that it would be fine then the markets would calm down, but with such uncertainty and speculation it has built itself up to this.
Similar to our issues with Northern Rock, if normal savers doubt that the Irish banks are fully supported then they will withdraw their savings, causing the banking system to fail even if they would have been fine all along. The rumour of bad news is enough to make it happen.