After months of speculation and the usual denial at the eleventh hour, debt-plagued Ireland applied for an EU/IMF bailout on Sunday purported to be between €80 and €100 billion. Ireland now follows Greece as the second eurozone country to formally seek assistance.
Reuters reports that in Bratislava, Slovak Finance Minister Ivan Miklos said Dublin had asked for help under the European Financial Stability Facility (EFSF), a temporary budget safety net. He told Reuters:
Ireland has asked for help from the EFSF and Slovakia has joined other eurozone partners and approved this.
At issue is the country’s ability to borrow money in the open market. With revenues from taxes down due to the global recession, governments are finding it difficult to balance their budget due largely to the vast amounts of debts that were piled up during the “good times.”
Why not just borrow your way out of recession the way the US seems to be doing? In short, because these countries can’t pull it off. Unlike the US, the PIGI’S can’t borrow money at reasonable rates anymore as bond buyers are demanding more than twice the normal going rate when these countries come to the open market to sell bonds. And the real kick in the teeth here is that the higher rates being forced upon the debt-struck countries only makes their budgetary problems worse.
So, instead of paying the exorbitant rates being asked of them by bond buyers, countries such as Greece and Ireland (and for the record, Portugal is likely next in line) have turned to the EU/IMF for funding.
European Union finance ministers were reportedly quick to agree to the bailout saying it “is warranted to safeguard financial stability in the EU and eurozone.”
AP reports that the European Central Bank, which oversees monetary policy for the 16-nation eurozone, welcomed the agreement and confirmed that the International Monetary Fund would contribute financing, while Sweden and Britain said they were willing to provide bilateral loans to Ireland, too.
Irish Finance Minister Brian Lenihan said Ireland needs less than €100 billion in order to backstop its state-backed banks. Reports show that the Irish banks are losing deposits at a rapid rate, are having a difficult time attracting deposits, and cannot borrow funds on the open market.
Lenihan said Ireland was asking eurozone and IMF donors to loan money to a "contingency" fund from which Irish banks could borrow when needed. The Finance Minister said the funds would "not necessarily" be used. He emphasized that the government's own operations are fully funded through mid-2011.
Unlike Greece, where the previous administration apparently spent money like drunken sailors with little worry about the future, Ireland’s troubles stem from the decision during the Global Credit Crisis to insure its banks against losses. And with this backing now sporting a tab in excess of €50 billion, the country’s deficit has swelled dramatically.
According to AP, Ireland's precipitous fall has been tied to the fate of its overgrown banks, which received access to mountains of cheap money once Ireland joined the eurozone in 1999. The Dublin banks bet the bulk of its borrowed funds on rampant property markets in Ireland, Britain and the United States, a strategy that paid rich dividends until 2008, when investors began to see the Irish banking system as a house of cards.
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