Ireland asked the European Union and the International Monetary Fund for an 85 billion euro ($112.1 billion) bailout in November 2010. Most of the money was used to redress problems in the Irish banking sector. Like other nations given bailout funds, Dublin was requested by its lenders to apply several fiscal consolidation measures to reduce its deficit and rectify its economy. The Irish budget deficit skyrocketed to 30 percent of gross domestic product after the government received the bailout, but Dublin managed to bring it down to 7.6 percent in 2012. The government also managed to reduce unemployment from 15 percent in the first quarter of 2012 to 13.7 percent in the first quarter of 2013, making Ireland the only bailout country to reduce its unemployment rate.
However, Ireland is also dealing with significant economic and financial problems. According to Eurostat, the Irish economy grew by 1.4 percent in 2011 and by 0.9 percent in 2012. But the first quarter of 2013 saw the Irish economy fall back into recession because of decreased exports and reduced consumer spending.
On July 22, Eurostat reported that Ireland's government debt to gross domestic product ratio was the fourth highest in the eurozone, reaching 125.1 percent of GDP in the first quarter of the year (it was 106.8 percent in the first quarter of 2012).
Moreover, the International Monetary Fund recently warned Ireland about the fragility of its banks. The organization was especially concerned about mortgage debts in Irish banks, particularly the so-called "tracker mortgages," which follow European Central Bank rates. (Since ECB rates are at historically low levels, the cost of funding exceeds the returns on these mortgages, thus hurting bank's profitability.) Dublin is currently in talks with the troika, which comprises the EU Commission, the European Central Bank and the International Monetary Fund, on shifting these mortgages out of the banks' main balance sheets.
Restarting the Debate
These contradictory data have created a debate over Ireland's economic future. On July 20, Prime Minister Enda Kenny said that the 2014 budget, which will be voted on in October, would be "the last of the difficult budgets," suggesting that fiscal consolidation measures would be reduced next year. Two days earlier, the troika concluded its 11th review of the Irish bailout program, praising the country for its efforts in reducing its deficit.
However, austerity measures are becoming increasingly unpopular at home. In June, Irish media released tape recordings of Anglo Irish Bank executives mocking Germany's involvement in the institution's bailout. This generated controversy in Ireland and in Germany on moral hazard issues associated with bailouts in the eurozone and reinforced the negative image of bankers among the Irish population. Then on July 19, a former International Monetary Fund chief of mission to Ireland blamed austerity measures for Ireland's weak economic growth. The International Monetary Fund distanced itself from these statements, but they came only a few weeks after the institution admitted mistakes in handling the Greek bailout in 2010. This restarted the debate over the merits of austerity in Ireland, with center-left parties and trade unions demanding softer measures.
According to an opinion poll published by The Irish Examiner in June, 74 percent of Irish are dissatisfied with how the Irish government is running the country. In July, an opinion poll from The Irish Independent revealed that the opposition Fianna Fail party currently has a 3 percent lead over Kenny's Fine Gael party. While general elections in Ireland do not need to take place before 2016, the country's main parties will compete in the 2014 elections for the EU Parliament — these elections often serve as a practical gauge of the popularity of mainstream parties, and early elections could take place if the government loses its majority.
Additional Financial Assistance?
Ireland has already received around 90 percent of its bailout, and the remaining funds will be disbursed before the end of the year. In March, Dublin successfully undertook its first sale of 10-year sovereign bonds since 2010, paying lower interest rates than other troubled countries such as Italy and Spain. Ireland also held several sales of shorter-term debt during the first six months of the year. Moreover, in February, Dublin and Brussels agreed to defer by decades the costs of nationalizing the Anglo Irish Bank. The nationalization was set to cost the Irish 3.1 billion euros each year for the next 10 years, but under the new agreement, the government would repay the debt from 2038 to 2053.
This means that Dublin probably will not need additional financial assistance during the second half of the year. However, Ireland will return to international markets in 2014 — this time without the support of the bailout. Thus Dublin very likely will apply for a precautionary credit line, which would be used in emergency situations, such as under extreme pressure from financial markets. The credit line would in turn allow Ireland to qualify for the European Central Bank's bond buying scheme, known as the Outright Monetary Transactions program.
In this context, we expect the European Union to grant Ireland the precautionary credit line through its permanent bailout fund, the European Stability Mechanism. In the coming months, the debate between the Irish government and the European Union will revolve around the question of how big the line will be and what conditions will be attached to the credit. The European Union will probably request strict surveillance and quarterly monitoring by the European Commission and the European Central Bank, as well as additional measures of fiscal consolidation. Kenny's government, in turn, will try to make as few concessions as possible, because it believes it already has applied too many unpopular measures in the pursuit of its fiscal goals.
Notably, foreign political considerations are also in play. Irish Finance Minister Michael Noonan recently admitted that little progress would be made before the Sept. 22 general elections in Germany.
Ireland's EU negotiations will be followed closely by Portugal, another troubled eurozone member that will see its bailout program end in June 2014. Like Ireland, Portugal was deemed a success story for the bailout system. But the Portuguese government currently is in the throes of a deep political crisis caused in part by the negative impact of austerity measures on the Portuguese economy. Portugal does not have significant financial needs in the short term, so it has some time to resolve its crisis. However, its post-bailout performance in international markets will be influenced both by political conditions at home and by Ireland's ability to successfully emerge from its bailout.
