IRELAND finally succumbed to pressure and gave up its fiscal sovereignty yesterday, with the government announcing that it had applied for an aid package to bail out the public finances and the country’s ailing banking sector.
Irish Prime Minister Brian Cowen would not give a figure for the bailout amount but finance minister Brian Lenihan told RTE news that it “would not be three figures” but would be in the “tens of billions”. Independent estimates for the amount range from €60bn to €120bn (£52bn-£104bn), with the money to be loaned at less than market rates.
Britain is reportedly to stump up €7bn – though it is not clear whether this will be a bilateral loan or whether it will go through the European Financial Stabilisation Mechanism. The other sources of cash will be the Eurozone member countries and the International Monetary Fund, with Sweden also having offered money.
As a condition of the bailout, the Irish government will be subject to regular reviews to make sure that it is on track in tackling its deficit.
The Irish government is due to publish a four-year-plan this week to bring its 11 per cent deficit (32 per cent counting the state’s guarantee of Irish bank loans) down to three per cent by 2014. It has said that this will involve savings of €6bn this year and €15bn overall, with most to be absorbed by spending cuts and tax rises on a two-to-one ratio.
However, Ireland will now have to negotiate the details of its deficit programme with its new creditors. Other Eurozone leaders want to bring the country’s low corporation tax of 12.5 per cent into line with their own higher rates, but the Irish government has called that issue “non-negotiable”.
EU finance ministers yesterday released a joint statement declaring that “financial support will be provided under a strong policy programme which will be negotiated with the Irish authorities.”
The IMF and EU could demand that Irish banks increase their core capital ratios from current levels of eight per cent. Allied Irish Bank revealed on Friday that it has been haemorrhaging cash, with €13bn worth of deposits – mostly from businesses – withdrawn since June. With Bank of Ireland also seeing outflows of €10bn in the third quarter of this year, there were growing fears of a run on Irish banks.
As part of the bailout, the banks’ financing package will include a restructuring that Cowen said would “downsize and make sustainable” the Irish financial system, although he would not give any further details.
In the UK, Chancellor George Osborne’s offer of help to Ireland has sparked discontent on the Tory backbenches, with John Redwood MP saying that the UK cannot afford to make loans worth billions: “The public will find it difficult to understand why certain items are being cut that matter to them, if the money being spent on EU contributions and euro support keeps soaring,” he wrote on his blog.