Ireland: Ireland accepts the EU-IMF rescue package
November 23, 2010
On 28 November, finance ministers of the Eurozone officially presented details of an Irish bailout plan laid out by the European Union and the International Monetary Fund, which aims to fix the country's strained public deficit. The emergency aid will amount to EUR 85 billion and will try to improve investors' confidence in the euro currency. As a result of the recent developments, Prime Minister Brian Cowen announced that general elections will take place early next year after a new budget is presented in December. For a long time, Irish authorities denied the necessity for such a rescue plan, as they insisted that the country was able to finance its spiralling deficit, which is projected to exceed 30% of GDP in 2010. Despite speculation that Ireland would need to abandon its attractively low 12.5% corporate tax rate in exchange for bailout money, the Irish government unambiguously decided to maintain it. The tax, seen as unfair competition by some Euro area members, was a key driver of the Irish economy, as the low rate attracted many multinationals and thus boosted investment in the country. As a precursor to the bailout, the government agreed to a new plan designed to cut the public sector deficit by EUR 15 billion over a four-year period. In the meantime, talks are also being held regarding new parliamentary elections to the Irish Parliament at the beginning of 2011. The opposition party is insisting on a swift power transformation in order to restore stability and confidence in the country. The new 2011 budget is believed to be approved in December this year. Furthermore, Irish bonds tumbled, as unsettled investors continued to sell public debt securities. On 29 November, Irish bond yields traded at 9.45%, which represents a 6.71 percentage point spread over German bunds. The government aims to reduce budget deficit to between 9.25% and 9.5% of GDP in 2011. Consensus Forecast panellists are more pessimistic than the government and see the fiscal deficit at 13.6% of GDP in 2011.