The Keystone Kops of the European Union
Last week-end there was a flurry of negotiations by the EU to craft a bailout deal for the Irish financial banking crisis. A proposed deal was agreed upon. The primary intent was to calm the jitters of the international bond markets and avoid a spread of the problem to other EU member nations. Come Monday morning it was apparent that the plan wasn’t working. During the week the cost of Irish debt continued to rise and more ominously the cost of Portuguese debt along with it. There was growing panic over the prospect of contagion not only to Portugal but also to Spain. The much larger size of the Spanish economy raised the stakes considerably.
Meanwhile the stability of the Irish government began to totter seriously. The coalition partners that were propping up the Fianna Fáil led government withdrew demanding new general elections. The government has been attempting to delay those until January in order to give them time to close the deal with the EU/IMF. Circumstances forced them to hold a bye election that they had been trying to put off. It was won by Sinn Féin which is generally considered to be the most radical of several parties. The cabinet has approved a harsh new austerity budget in response to the EU negotiations, but it has not yet been adopted by the parliament. On Saturday there were mass protest in Dublin. Demands are being made that parliament be dissolved and a general election held before adoption of the widely unpopular budget. The government is attempting to ignore those demands.
With this chaotic atmosphere Sunday in the EU has had the trappings of a farce from the silent movie era. About all that is lacking is the old fashion seltzer bottles. The Irish cabinet was in marathon session. The finance ministers of the EU member states convened an emergency meeting in Brussels and the various heads of state were engaged in frantic telephone consultations. This all resulted in a formal conclusion with the Irish government. The panic was to have a signed agreement before the financial markets open on Monday morning. The BBC has the most specifics about the agreement that I have been able to find so far.
Details of the 85bn euro plan include:
an average interest rate on rescue loans of 5.83%
the 35bn euros allocated to Irish banks is divided into 10bn euros for “immediate recapitalisation measures” and 25bn euros as a contingency fund
Irish Republic itself will contribute 17.5bn euros to the overall fund
the EU will contribute 45bn euros, including direct bilateral loans from the UK, Sweden and Denmark
the IMF will contribute 22.5bn euros
allows the Irish Republic to delay by one year to 2015 its deadline for reducing its budget deficit to 3% of GDP.
The Irish government has also said that interest payments on all state debt will account for more than 20% of tax revenues in 2014.
The deal does not require the Irish Republic to change its low 12.5% corporation tax.
Reports are that Germany was pushing for a punitive interest rate of 7%. There are different rates for various pieces of the package so there will be different versions of what the actual cost will be. The Irish contribution will be obtained by a raid on the government pension funds. The low corporate tax rate has been a highly contentious issue. So far there is no mention of the Irish austerity budget as a specific requirement of the deal. That is one of several important unanswered questions.
While the finance ministers were meeting they attempted to address the issue of the terms of an ongoing EU bailout mechanism. One of the issues contributing to the general market panic was comments from Angela Merkel and others that bond holders might have to expect some debt restructuring that would require them to share the pain. Today’s new agreement as so far reported is a classic example of vague EU fudge. There is some reference to debt restructuring but the terms are anything but specific. I will be attempting to get more detailed information about it tomorrow.
Is this installment of the Keystone Kops going to be sufficiently entertaining that the bond markets will sit back, relax and let Portugal off the hook for the time being? Somehow I wouldn’t count on it. Stay tuned.
For anybody interested I have started a Facebook discussion group on the EU Financial Crisis. It is an open group and anyone is welcome to join. The name of the group is
European Union Financial Crisis
It can be located by a Facebook search.