Irish Bailout Is Agreed, But Markets Remain Skeptical

By: Dr. Mike Campbell

An aid package was agreed between the Irish government and the European Union over the weekend which would see the Republic granted €85 billion. Of this funding, €50 billion has been provided to the government to help it meet day-to-day finance and the remaining €35 billion is intended to support the Irish banking sector.

The bailout package is not being provided out of the kindness of the heart of EU members. The Irish will be paying interest on the loan at a rate of 5.8% which is substantially lower than the current yield on Irish bonds, but very much lower than they yield on German or UK bonds.

There had been speculation that Irish corporation tax would have to be increased to be more in line with the average EU value. Notably, the French and the Germans were said to be seen to add this caveat to the deal. However, Irish corporate tax is to remain at 12.5% and was not, in the end, a factor in the deal.

It appears that considerable pressure was put on the Irish to agree to the deal in the hope that it would quell market uncertainty over “contagion” – the risk that the sovereign debt crisis would spread to other nations such as Portugal and Spain; both of which have substantial public debts.

The value of the Euro rose briefly on Monday, but had resumed its downwards trend by mid-morning. The markets, it seems, are unconvinced by the EU move and worries about contagion persist. Of course, a lower value Euro is beneficial to the Eurozone in the current economic climate since it makes imports to the zone more expensive (favouring internal market producers) and exports more competitive in the global market.