Fisher Investments Editorial Staff
Others

The Still-Fighting Irish

By, 11/23/2010

Story Highlights:

  • Ireland officially requested fiscal aid on Sunday, and negotiations began Monday.
  • The bailout package is expected to total €80-€90 billion.
  • As one might expect, the bailout and impending austerity budget are politically unpopular. The ruling coalition announced it would dissolve the government and call elections in January.
  • Despite political upheaval, the budget will likely pass. And as EU and IMF officials increasingly call the bailout shots, it may matter less which party or coalition is in control. 

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On Sunday, Ireland officially requested aid from the EU and International Monetary Fund (IMF). Negotiations began Monday—the total bailout package is expected to be about €80-€90 billion. When asked whether the loan could total more than €100 billion, Irish Finance Minster Brian Lenihan said it "certainly will not be a three-figure sum." (He's right—it'll be at least 11 figures.)

Of that amount, 33%-50% of the aid will come from the IMF. The rest will be funded by two EU facilities created in May: The €60 billion European Financial Stability Mechanism and the €440 billion European Financial Stability Facility, which is backed by eurozone government guarantees. The UK and Sweden are also contributing €8.2 billion and €1.1 billion, respectively.

The €80-€90 billion figure is as expected and should appropriately meet Irish needs. Even so, doomsayers are already concerned the package isn't large enough, and their argument rightly notes the announced sum doesn't guard against a worst-case scenario. But let's not forget the announced amount is a fraction of the total €750 billion bailout package—the length of Ireland's lifeline is still flexible.

As one might expect, the bailout and impending austerity budget—to be voted on December 7th and worth €15 billion in spending cuts and tax raises—are politically unpopular, and the ruling coalition, led by the Fianna Fail party, is hanging by a thread. The budget seems likely to pass, but it may cost Fianna Fail control of the government. The Green Party, second in the ruling coalition, agreed to support the budget only if Fianna Fail called elections in January. Prime Minister Brian Cowen had little choice but to comply and announced he would dissolve the government after the vote. 

Though an official bailout announcement ended the speculation, Irish political uncertainty may have contributed to a down Monday in Europe and globally. The specifics of a rescue package negotiated by a lame-duck government are less certain than those backed by a strong political mandate. And investors want to see the budget passed and implemented, not wrangled over. Getting past the vote may calm nerves. It seems likely parliament will decide that avoiding market turmoil is politically the most palatable course. And as EU and IMF officials increasingly call the bailout shots, it may matter less which party or coalition is in control.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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