Chain Reaction

Every reaction has an equal and opposite reaction- Newton

Severe financial constraints forced the Irish government to accept the European Union –International Monetary Fund bailout package. Brian Cowen’s government agreed to all clauses before signing the Memorandum of Understanding in Dublin on November 11, 2010.

Sovereign debt crisis is spreading like a virus among Eurozone economies.  After the crisis in Greece, Ireland received poor rating from international rating agencies like Moody’s and S&P.  Instead of investing in UK, Germany, and France foreign investors had diverted their funds to Ireland due to the flexible financial policies (lower corporate taxes) adopted by Cowen’s Government.

Widespread criticism in both public and political spheres has become a headache for Brian Cowen who negotiated the € 86 billion bailout package for his country. Major Nationalist opposition party of Ireland, Sinn Fein on December 1, decided to take legal action against the government, which did not put the bailout for vote in Irish Parliament.

The determined Sinn Fein part was highly critical on Brian’s government, "We have sought legal advice but we need to see the memorandum of understanding before we can take a definite legal view," said a spokesperson for Sinn Fein party. According to some politicians, Ireland must use its own cash reserve and money from pension funds to reduce the foreign borrowings such as the current EU-IMF bailout.

Premiums from Debt

Debt bonds are just peer-to-peer lending: someone has to pay for it, and in this case it is the Eurozone members. Post bailout all the member countries are required to pay high interest rates on Irish debt bonds. Instead of strengthening the regions economy; thus weakening the money flow putting pressure on European Union and European Central Bank.

Ignoring the legal tussle in Ireland for the moment, the BusinessWeek’s report on November 21 has stated the ECB is speculating to buy Irish 10-year debt bonds. On the other hand, EU for the first time has decided to come up with debt bond issues ranging from € 5 billion to €8 billion and an average 7.5 years maturity, which will go on sale by January 2011 in the international market.

Europe’s bond market witnessed a slump when the largest bond market in Eurozone, Italian bonds yield dipped by 17 points to 4.53%. Adding burden there was a yield drop in Irish 10-year bonds, standing now at 9.13% after a 31 basis point drop. It created a unforeseen chain of effects across the Eurozone. The effect of the Irish bailout is slowly unravelling one country after country. As said in my earlier post ‘riding a sinking ship is not a good idea in a large ocean,’ Irish government managed the 2008 liquidity crisis infusing € 50 Billion into the Banking system which is already a enlarged bubble that can deflate anytime collapsing the financial market. ECB President Jean-Claude Trichet on November 31 said “investors are underestimating policy makers’ determination to shore up the region’s stability after the bonds of high-deficit euro-area nations slumped.

Political Harmonisation

One must not forget the political harmonisation that has emerged in the backdrop of issues surrounding the bailouts in Eurozone. High profile members like France, German and Belgium are playing a pivotal role in determining fiscal policies across EU member states, this will reduce the government’s clout. Effectively centralising the economic policy will be a great leap forward for EU member countries.

Brussels, headquarters of the European Union will soon become a major powerhouse, controlling the entire region. Such moves may perhaps foster a strong Euro in the world market, at the cost of the liberty of member countries.

RT's Keiser Report on Ireland's forced bailout


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