Economic Outlook: After the Bailout
Online, November 29, 2010 (Newswire.com) - Markets opened mostly higher in Asia and mostly lower in Europe Monday with the European Union announcing an $88.7 million loan package for Ireland.
Financiers are hoping to plug a serious budget gap in Ireland, the result of falling tax revenues and having to inject $65.7 billion in banks that were suffering from sour loans. Ireland's deficit this year soared to 32 percent of the country's gross domestic product, 10 times the amount set by EU guidelines.
The trick now is to restore investor confidence, but the truth is bailouts hurt. The European Commission said the eurozone's gross domestic product could to drop to 1.5 percent next year from 1.7 percent in 2010, as disenchantment is likely to spread. Ireland is to pay an average of 5.8 percent on loans, some of which are expected to take 10 years to repay. In addition, Ireland was ordered to use $23 billion of its own money, much of it from a government pension fund, to help with the bailout.
On Sunday, protesters took to the streets in Dublin, as rescuers once again spared bondholders from taking losses. Taxpayers will be double-billed, instead, with higher taxes and fewer services. Irish writer Valerie Whelan said: "We are suffering so the bondholders don't suffer. It's capitalism gone mad," The Wall Street Journal reported.
Prime Minister Brian Cowen said Sunday the bailout "provides Ireland with vital time and space to address the problems we've been dealing with since this global economic crisis began," and therein lies the rub. Nobody would loan anyone a dime if time and space were not part of the equation, which many say puts Ireland's back to a brick wall. Its economy is shrinking. Time and space with underlying growth has a nice ring to it, but Ireland doesn't have that.
It took a bailout of Greece and now Ireland for finance ministers to see the writing on the wall and rewrite the rules for future rescue attempts. After 2013, bondholders will have to shoulder some of the costs as the EU will mandate debt be restructured in some cases.
With the new rules, the EU will follow International Monetary Fund procedures, said Herman Van Rompuy, president of the European Council in a statement.
"Our framework will be fully in line with the IMF approach," he said.
In international markets, the Nikkei 225 index climbed 0.86 percent while the Shanghai composite index in China fell 0.19 percent. The Hang Seng index in Hong Kong rose 1.26 percent while the Sensex in India rose 1.4 percent.
In Australia, the S&P/ASX 200 rose 0.44 percent.
In midday trading in Europe, the FTSE 100 index lost 0.85 percent while the DAX 30 in Germany lost 1.19 percent. The CAC 40 in France lost 1.13 percent. The Stoxx Europe 600 fell 0.7 percent.
But Sunday to Sunday, from the time Ireland applied for aid to the time the deal was announced, yields on benchmark 10-year bonds rose in Greece, Ireland, Portugal, Spain and Italy, precisely the country's that could use cheaper borrowing the most.
More recently, interest rates dropped in Greece after the EU said it would renegotiate the bailout package to match better terms given to Ireland. Yields on 10-year Greek bonds dropped 19 basis points to 11.46 percent, the Times reported.
