European Union finance ministers yesterday (21 November) agreed a request from Ireland to help it deal with its crippling debt problem. The plan, to be finalised this week, is estimated to be worth 80-90 billion euros and will be subject to strict conditionality, including a four-year austerity budget.
After days of hesitation, Ireland finally submitted a formal request for financial assistance on Sunday (21 November).
"The European authorities have agreed to our request," Prime Minister Brian Cowen said. "I expect that agreement to be finalised shortly, within the next few weeks."
EU finance ministers held a conference call at around 18:00 Brussels time in which they agreed on the Irish demand, in order "to safeguard financial stability in the EU and in the euro area".
The package is aimed at stopping market concerns about Ireland's debt from spreading to other countries with big budget gaps such as Spain and Portugal.
"The financial assistance package to the Irish state should be financed from the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF), possibly supplemented by bilateral loans to be negotiated by EU member states," according to a statement from the Eurogroup and the Ecofin ministers, published at around 20:00.
The ministers added that the United Kingdom and Sweden have already indicated that they stand ready to provide a bilateral loan, with Britain saying it would offer about seven billion pounds (8.15 billion euros) in bilateral aid.
The details of the package, which is estimated at around 80-90 billion euros, are now being negotiated between the Irish authorities, the European Commission and the International Monetary Fund, in liaison with the European Central Bank.
The money will be provided "under a strong policy programme" aimed at returning the Irish deficit to "3% of GDP deficit by 2014".
The four-year fiscal austerity package is expected to contain plans for a new property tax, as well as cuts to benefits and services. Tax breaks for higher earners may also go.
The programme will imply "an overall consolidation of 15 billion euros in the four-year strategy, which contains an annual review," the ministers said.
The programme will also include a fund for potential future capital needs of the banking sector. "A comprehensive range of measures – including deleveraging and restructuring of the banking sector – will contribute to ensuring that the banking system performs its role in the functioning of the economy," the ministers' statement adds.
Portugal and Spain next in line?
German Finance Minister Wolfgang Schaeuble said the bailout should prevent a contagion to other eurozone countries. "If we now find the right answer to the Irish problem, then the chances are great that there will be no contagion effects," he told ZDF television on Sunday.
But analysts were not that optimistic. "In the short term this should be positive for risk appetite," said Peter Chatwell, rate strategist at Credit Agricole CIB in London, cited by Reuters. But he added: "I don't think this does anything to take Portugal and possibly Spain out of the firing line."
"Will it prevent contagion? In the short term, but not in the medium term. It only calms down markets and gives the other countries some room to breathe. Particularly, Portugal is not off the hook yet," said Carsten Brzeski, economist at ING.
"I think it means Portugal is next [to request help]," said Filipe Garcia, economist at Informacao de Mercados Financeiros Consultants in the Portuguese city of Porto.
"I don't know if it will happen before the end of the year or after, but it's almost inevitable now," he said. "I think we've probably passed the tipping point of what is sustainable in terms of paying interest rates on debt."
If markets turn on Portugal, Spain may be next after that.
"If Portugal is forced to take a bailout then they'll turn their attention to Spain and I don't know what the government will do," said Edro Schwartz, economist at San Pablo University in Madrid.
(EURACTIV with Reuters.)