Tilted Forum Project Discussion Community - View Single Post

roachboy · 11-22-2010, 07:48 AM

Quote:

In Ireland, Call for Election and Warning From Moody’s
By LANDON THOMAS Jr. and MATTHEW SALTMARSH

DUBLIN — Ireland’s decision to accept a rescue package worth more than $100 billion prompted a call Monday for early elections and a warning from a major ratings agency that the bailout could prove to be a “credit negative” for the country.

European Union officials, who had been pushing Ireland to accept help, quickly agreed to the request late Sunday, committing a significant amount of money to an ailing member for the second time in six months. The total amount was not announced, but several officials said it would be 80 billion to 90 billion euros, or $109 billion to $123 billion. Last spring, Europe disbursed 110 billion euros to Greece to save it from default.

The move, which will allow Ireland to shore up its faltering banks and operate without having to borrow money at budget-breaking rates, was welcomed by Ireland’s neighbors on Monday, although financial markets were more cautious. There were also rising worries about political stability in Ireland as a result of the bailout and the angry public backlash it engendered.

The Green Party, the junior partner in Ireland’s coalition government, announced it would pull out of government once a series of fiscal packages and budgets were in place next month — and called for early elections after that.

“We have now reached a point where the Irish people need political certainty to take them beyond the coming two months,” the Greens said in a statement, according to Reuters. “So, we believe it is time to fix a date for a general election in the second half of January 2011.”

The parties in Ireland’s coalition government include Fianna Fail, the Greens and a few independents, and it has a slim majority in Parliament.

Meanwhile, Moody’s Investors Service said its current review of Ireland’s credit rating could result in a “multi-notch downgrade” as a result of the bailout, although it would still be investment grade.

The aid will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden,” a Moody’s senior credit analyst, Dietmar Hornung, said in a research note. That would be a “credit negative” for Ireland, “and, consequently, the credit quality of bank deposits and debt that the sovereign explicitly and implicitly supports.”

Moody’s put Ireland’s Aa2 credit rating on negative outlook last month. Ireland has a stable outlook at Standard & Poor’s and Fitch Ratings.

In the markets, the initial positive reception turned to a more stark assessment as investors focused on the problems that lie ahead for Ireland and the broader euro area.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, was up at the open but by midday was down 1.1 percent. The FTSE 100 index in London was down by a similar amount. The euro fell to $1.3644 from $1.3673 late Friday in New York.

The reaction of bond prices was muted. The Irish 10-year yield fell 11 basis points, but — at 7.73 percent — still carried a hefty premium to the comparable German bond, the European benchmark, at 2.67 percent.

Simon Ballard, senior credit strategist at Royal Bank of Canada in London, said the aid was a “short-term positive for risk assets and the Irish sovereign,” but he added longer-term worries remain about the state of banks and the outlook for growth.

“The devil will be in the detail as always, particularly on the conditionality attached to the funds,” he said. “We see the bailout as weighing on financial spreads in the coming days as we work through the uncertainty.”

The loans to Ireland were necessary in large part because of the faltering state of the nation’s banking system, underscoring the extent to which ailing banks remain a threat to recovery two years after the financial crisis rippled through economies and pressured banks around the world into accepting bailouts.

Ireland’s aid will come from a rescue mechanism worth roughly $1 trillion that was set up in May by the European Union and the International Monetary Fund to help euro zone countries spiraling toward default.

Officials said they hope that the large commitment of money will calm investors and keep the crisis from spreading to Portugal and even Spain. It was fear of a market panic and looming contagion that prompted officials to press Ireland to accept aid early before its debt problem got out of control.

On Monday, the British chancellor of the Exchequer, George Osborne, said Britain’s share would be about 7 billion euros, or $11 billion, via bilateral aid as well as through its I.M.F. commitments.

“We are not part of the euro and don’t want to be part of the euro,” Mr. Osborne told the BBC . “But Ireland is our very closest economic neighbor so I judged it to be in our national interest to be part of the international efforts to help the Irish.”

The French economy minister, Christine Lagarde, praised Dublin for taking what she called “courageous but necessary” steps to rectify its economic problems. She added the financial aid would not affect France’s budgetary situation as the aid that it would provide would be in the form of guarantees to a European financial stability fund.

The request for help was a humbling turnabout for Ireland, which just last week was insisting it could manage its own finances. It does not view itself as being as profligate or irresponsible as Greece was in running up deficits, and has been preparing a four-year budget plan filled with sharp cutbacks that is intended to reduce its deficit to 3 percent, from 32 percent, of gross domestic product.

But the Irish government has been sinking further and further into debt since its 2008 decision to protect its banks from all losses. The banking system had become so weakened that it could not afford to wait any longer for help.

Banks, which issued loans recklessly during the real estate boom, have losses of about 70 billion euros, almost half the country’s economic output. A new set of bank stress tests will be imposed, and the number of banks will be pared down, officials said.

Some economists have pointed out that the yields Greece must pay on its bonds are higher now than before its rescue, raising concerns that confidence in the fiscal health of troubled countries remains low.

Others, however, say that decisive action is what is needed to shift momentum toward recovery. “This may be an inflection point, when we stop digging a hole and start creating the conditions for reversing where we have slipped to,” said Pat Cox, an economist and former president of the European Parliament.

Mr. Cowen said Sunday night that there would be two funds. One will back up the country’s failing banks, and another will allow Ireland to continue government operations without turning to the bond markets for help, something Dublin has said it cannot afford. The package should allow Ireland to operate without funds from the markets for as long as three years.

While a precise breakdown was not given, analysts and people involved in the talks said that about 15 billion euros was probably to go to backstop the banks. As much as 60 billion euros would go to Ireland’s annual budget deficit of 19 billion euros for the next three years.

Mr. Cowen said that a negotiation would begin with the International Monetary Fund to discuss the specifics of the loan, although it was made clear that the interest rate would be lower than the 8 percent demanded by the market.

The quicker-than-expected action over the weekend was prompted by fears of a bank run when the markets opened Monday morning, people briefed on the discussions said.

As much as 25 billion euros has flown from large banks like Allied Irish and Anglo Irish in the past months and officials say that the pace had quickened in the last week.

Mr. Cowen said that the government’s budget plan would involve 15 billion euros of savings — 5 billion euros in tax increases and the rest in spending cuts. He said the plan would be published Wednesday and the budget issued on Dec. 7. Ireland will not be required to raise its low corporate tax rate of 12.5 percent, something it had strongly resisted.

“The I.M.F. will not micromanage the Irish economy,” Mr. Cowen said, in response to questions that the government was being held hostage. “And we are not ceding any policy sovereignty.”

So far, there have been few strikes in Ireland. People have been conditioned to believe that the deficit must be cut and that Ireland, as a small open economy, has little choice but to pay its debts and take the tough policy choices.

But there is likely to be a limit to this patience as spending cuts hit social services that by and large have remained protected. Irish unemployment is around 12 percent, and services like universal child benefits remain generous by European standards.

In another sign of public mood, the Sunday Independent newspaper displayed the photos of Ireland’s 15 Cabinet ministers on its front page, expressing hope that the International Monetary Fund would order the Irish political class to take huge cuts in pay and benefits. It also called for the “slaughter” of Prime Minister Brian Cowen’s Fianna Fail party at the next election.

http://www.nytimes.com/2010/11/23/bu...ef=global-home

meanwhile:

FT.com / Europe - Ireland plunged into political turmoil

it appears that the political meltdown alluded to in the ny times piece, visible through the soporific language, is already starting to happen.

o and last week featured a run on the main banks in ireland.

here's a link to the financial times background coverage of the irish situation:

Ireland fiscal crisis: In depth news, commentary and analysis from the Financial Times

which is quite good as resources go.

so...

what do you think is happening here?
what do you think it means for the european union? for england? for the international capital flow systems?

it's clear that the crisis of transnational capital that blew up a couple years ago is still unfolding, that political and ideological paralysis continue to make coherent approaches to dealing with it almost impossible as people run away from considering the harder choices that would break with neo-liberal ways of thinking and retreat into neo-fascist style nationalism that dresses itself up in the same economic bromides that enabled the crisis in the first place.

at the same time, it's also clear that one result of the series of implosions that began with greece, had portugal and spain teetering and which is now eating ireland has resulted in something like a reversion to bretton woods, with the imf being transformed away from the ad hoc role it accumulated after the 1970s of engine of structural crisis in the southern hemisphere under the figleaf of "structural adjustment" back into a kind of governor (in the engine sense) on currencies.

and we're watching something new and curious being worked out here.

what you do you see as happening?
what do you think should happen?

this could get real interesting...

---------- Post added at 03:48 PM ---------- Previous post was at 03:46 PM ----------

addition: this link takes you to the guardian's "live coverage" blog, which is also pretty interesting:

Ireland bailout - live coverage | Business | guardian.co.uk