Well, Act l of the Irish soap opera appears to have concluded today. As expected, the EU and various other European states stepped up to provide a fistful of money for Ireland to finance its ongoing borrowing requirements and to once more try and recapitalize and fix its banking system.
The Business Insider and Joe Weisenthal have the complete text of the Irish announcement and Joe nicely summarizes the key points:
The three main details to note:
- The full bailout announcement is €85 billion.
- On average, if the whole thing were drawn down, the interest rate would be 5.8%.
- €17½ billion of the bailout will come from Ireland’s own pension fund. Expect howling.
The WSJ provides a little more detail. They point out that the term of the loans to Ireland extend to 10 years and, as expected, contain no haircuts for existing creditors. The EU appears to have agreed that creditors will have to accept writedowns starting in 2013 but the details quoted in the Journal seem so to have holes large enough to drive a semi through.
The Irish are at least for some time freed from the need to rely on the markets to fund their country. They have been handed a pile of cash to hopefully finally fix their banking system and fund their deficit. All they have to do is come to some sort of national agreement as to how they reorganize the expenditure of the share of GDP that the government extracts from the citizens in order to service the new debt and maintain services. Oh, and they have to come to some sort of agreement about how much of GDP they intend to confiscate.
That’s the rub, of course. The Irish have already installed some pretty drastic austerity measures and its problematic just how much more the government is going to be able to persuade the electorate to part with. Even if some sort of accommodation is reached, the patience of the Irish will be sorely tested if their economy is crippled by its debt. In attempting to insulate its banks from haircuts, the EU may have imposed a politically unworkable solution on Ireland.
Aside from the issue of whether Irish leaders will be able to push through the needed austerity measures is the question of what impact this solution will have on the fortunes of Portugal and Spain. It may mute the immediate pressure but I don’t think it will solve the problem. Perversely, it might embolden creditors to up the ante in an effort to get new money from the EU into those economies. There’s a large element of just buying time going on here, but when the alternative is significant loss of principal time looks like a good bargain.
Lots of unknowns and twists and turns are likely not just in Ireland but throughout the EU. This play will likely have lots of acts and take some time to play out. My guess is still that the end game is no Euro or one that is confined to a few core countries.