Electronic Assignment Cover sheet

Course Title: MSc International Banking and Finance

Module/Subject Title:

International Financial Institutions and Markets

Assignment Title:

Ireland`s bailout by Europe and the IMF

No of Words:

976

IRELAND`S BAILOUT BY EUROPE AND THE IMF

CONTEXT One of the consequences of the banking crisis and the recession it provoked has been sharp rises in levels of gross government debt in almost every Western European country. Particular attention has focused on the debt of the so called PIIGS economiesPortugal, Ireland, Italy, Greece and Spain. The cost to governments of bailing out the banks has been huge: Table 1. The costs of bailing out the banks: selected countries as at March 2011; percent of 2010 GDP Country Ireland Netherlands Germany UK USA Greece Belgium Spain Direct support 30.0 14.4 10.8 7.1 5.2 5.1 4.3 2.9 Recovery 1.3 8.4 0.1 1.1 1.8 0.1 0.2 0.9 Net direct cost 28.7 6.0 10.7 6.0 3.4 5.0 4.1 2.0

Source: IMF (2011) Fiscal Monitor, April (p. 8). Governments almost everywhere have adopted programmes of major cuts and reductions in public spending on a scale not seen for decades. Ireland had to adopt one of the toughest budgets in the nations history. (Kitson, Martin and Tyler, 2011)

Irish banks had lost an estimated 100 billion euro, much of it related to defaulted loans to property developers and homeowners made during the property bubble, which burst around 2007. Ireland could have guaranteed bank deposits and let private bondholders who had invested in the banks face losses, but instead borrowed money from the European Central Bank to pay these bondholders, shifting the losses and debt to its taxpayers. NAMA purchased over 80 billion euro in bad loans from the banks as the mechanism for this transfer. The Irish economy collapsed during 2008. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth 750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). On 23 April 2010, the Greek government requested the EU/IMF bailout package (made of relatively high-interest loans) to be activated. The initial size of the loan package was 45 billion ($61 billion) and its first installment covered 8.5 billion of Greek bonds. IRELAND`S BAILOUT By September 2010 the banks could not raise finance and the bank guarantee was renewed for a third year. This had a negative impact on Irish government bonds, the yield on the benchmark 10-year bond breaking the sky-high 9% barrier. Government help for the banks rose to 32% of GDP, and so the government started negotiations with the EU, the IMF and three nations: the United Kingdom, Denmark and Sweden, resulting in a 67.5 billion "bailout" agreement of 29 November 2010. Together with additional 17.5 billion coming from Ireland's own reserves and pensions, the government received 85 billion, of which 34 billion were used to support the country's ailing financial sector. In return the government agreed to reduce its budget deficit to below three percent by 2015. In February the government lost the Irish general election, 2011. In April 2011, despite all the measures taken, Moody's downgraded the banks' debt to junk status. The Irish sovereign debt crisis was not based on government over-spending, as in the case of Greece, but from the state guarantee blanket for the six main Irish-based banks that financed the property bubble. The EU-IMF loan agreement which the Irish government finally agreed in November 2010 was shaped by a variety of competing objectives, among them: the need to protect European Central Bank liquidity to prevent broader European financial sector losses,
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to limit German taxpayer exposure to the need to bail out weaker economies (Hardiman, 2010).

SOME POSITIVE OPINIONS The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". As a result of the improved economic outlook, the cost of 10-year government bonds, which has already fallen substantially since mid July 2011 is expected to fall further to 4 per cent by 2015.

Looking behind, we can see that five countries that faced meltdown in the past 20 years have all recovered with or without IMF bailouts: Thailand: Is where the Asian Financial Crisis started in 1997 - Thailand accepted a $17.2bn bailout from the IMF. Russia: A fall in global commodities prices was the key reason why Russia defaulted on its domestic debt in 1998. Brazil: In November 1998, the country had been forced to accept a $41.5bn rescue package from the IMF, after economic crises in Asia and Russia seriously affected Brazilian economy.

Argentina: Suffered an economic crash in 2001-2002 which called into question the economic survival of the nation. Iceland: In 2008, the banks started to run out of cash, the Icelandic krona plummeted, and by the end of the year the national debt had hit 240% of GDP. Iceland was forced to go to the IMF, which provided a $2.1bn loan.

In addition, terms of Irish bailout deal changed in better in September 2011. Under proposals adopted by the European Commission, reduced interest rate margins and extended loan maturities are to apply to funds provided by the EU under the European Financial Stabilisation Mechanism (EFSM). The current margin of 2.925 per cent which applies to Ireland will be reduced to zero, while the maximum payback timeframe will double from 15 to 30 years. In effect, this means that the EC will now only charge Ireland what it costs them to borrow the monies it uses to fund the loan. The changes will apply to alreadydispersed tranches as well as future tranches. The new financial terms are considered to bring enhanced sustainability and improved liquidity outlooks to Ireland as well as more confidence in the markets. (Lynch, 2011)

REFERENCES: Barbieri, Rich (2010) EU unveils Irish Bailout [online] http://money.cnn.com/2010/11/28/news/international/ireland_bailout/index.htm Kitson, Martin and Tyler (2011), The geographies of austerity, Cambridge Journal of Regions, Economy and Society 2011, 4, 289302 [online] http://cjres.oxfordjournals.org/content/4/3/289.full.pdf Lynch, Suzanne (2011) Terms of Irish bailout changed, The Irish Times
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http://www.irishtimes.com/newspaper/breaking/2011/0914/breaking27.html Manson, Daniel (2011) Ireland set for strong recovery after bail-out [online] http://www.publicserviceeurope.com/article/790/ireland-set-for-strong-recovery-after-bailout The 2011 Euro Plus Monitor, Berenberg Bank and the Lisbon Council [online] http://www.scribd.com/doc/72779953/Euro-Plus-Monitor-2011 The Guardian (2010) Can Ireland bounce back? How five other nations fared in financial crisis, [online] http://www.guardian.co.uk/world/2010/nov/26/ireland-bounce-back-five-crisis