Bailouts… Hell or Heaven?

“Once an investment heaven, now a bailout hell”

At one point of time, the stock market flourished with skyrocketing indices, soaring oil prices, and cheap lending rates. It was realised very late, perhaps, the market which was on the brink of a collapse. The situation was very fragile, making economies stress the market beyond its limits. World markets melted like Antarctic ice sheets; soaring prices of commodities, continuing oil subsidies and cheap lending rates acted as catalysts for the 2007-2010 economic crises.

The so-called developed nations’ economies went on a roller coaster ride, ultimately forcing the government institutions to lend more money or create money out of ‘thin air,’ in the form of government bonds through central banks.

Countries across the world witnessed huge financial backlogs. Keeping in mind the interest of large corporations and financial institutions, governments announced rescue packages. But this decision also had a much broader effect all over the world, and in particular Europe. The European Union (EU) parliament, soon after the 2008-2009 United States’ $700 billion bailout, decided to make amends by cornering some of its ‘poor’ members to fulfil certain credit and debit balance requirements. As expected, these countries failed to do so, and thus the stocks of major corporations went into a nosedive.

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For the sustenance of any economy, floating money (money circulation) is crucial. The central banks of many Euro Zone countries such as Greece and Ireland were under tremendous pressure to strengthen financial regulations and raise lending rates. The EU’s Economic and Financial Affairs Council then decided to create a sovereign fund of €440 billion, known as the European Financial Stability Facility (EFSF) to put and end to this fiscal disaster.

Episode of Greece

Protests in Acropolis Temple

In the wake of 2009 financial crisis, tourism and agriculture industry suffered a great loss in Greece. This proved to be a perfect launch pad for workers to protest against the government, demanding wage revision. The Greek Government had huge debts both in current and reserve accounts. EU heavy weights like Germany and France pressurised the Greeks to accept the package and carry out more stringent austerity measure and cut public spending by 2015. When the workers strike turned into  national turmoil in Greece, the markets crashed, essential services came to a halt and resulting into an economic gridlock. 





Euro Zone member countries were in deep peril about the bailout packages for ailing economies. The Greece bailout was just a trailer; Ireland is a Première, but the main picture is still in making. As many market analyst pointed out “Dumping money in draining market is like riding on a sinking ship”. Floating money has drastically come down to the lowest in the couple of decades, thus raising concerns about the stability of the governments.

Irish Episode

Protest in Dublin

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With a strong balance sheet, the highly determined Irish government led by Taoiseach (Prime Minister) Brian Cowen was forced to carry out a government campaign in support of the bailout package. Cracks slowly developed within the ruling Green Party leaders, starting with John Gormley who showcased his criticism and also issued statements about possible general elections in January 2011.

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France and Germany are keen on pressurising the Irish government to increase its tax rate, which they see as unfairly diverting jobs and investment to Ireland which could have otherwise gone to them.

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The jump start methodology (bailouts) will damage the economic sustainability of any country says a market analyst in Britain. After this information broke out, Britain’s pound sterling (£)  was hit badly.

When asked, John, an Irish national, made his frustration over  Cowen’s government and said “Now I’m no economist, and I don’t claim to understand it all fully, but I do know that it’s one of the biggest decisions to be ever made in the history of the Irish state. Per capita, the potential downside dwarfs the US$700 billion United States bank bailout of last year. The leader of the opposition, Enda Kenny, has called it a “€90 billion ‘double or quits’ gamble by the government on the property market”. Cynics, and there are many, see it as a bailout for Fianna Fáils (the major party in the coalition government) big-property-developer buddies, using taxpayers money. An opinion poll yesterday gave the government less than 20% support, with satisfaction ratings at 11%. George Bush was more popular in Tehran than that. Even if NAMA (National Asset Management Agency) were the best decision ever, this government does not have the moral authority to make a decision of such magnitude.”

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The Irish government has decided to raise tax and cut spending with predictions of Value Added Tax (VAT) climbing up to 24%. As per the latest report on Irish Times, the Irish Government has come out with a 140 pages long recovery plan called ‘The National Recovery Plan 2011-2014’ under which Brian Cowen (PM, Ireland) and his team will work on reducing public spending up to €15 billion for four years. International Monetary Fund (IMF) and EFSF are believed to be lending an €86 billion package to Ireland. As a Euro Zone economy, England is said to pump in €8.25 billion into the Irish reserves. It is also believed that Ireland has entered the lowest debt to GDP ratio in Euro Zone. 






LINKS

BBC News: Austerity Plans
Guardian UK: Spain & Portugal to Resist EU & IMF
Irish Times: Efforts to finalise bailout package
BBC News: Irish Protest