Pedestrians pass the Bank of Ireland offices in Dublin, Ireland, on Monday, Dec. 22, 2008. Bank of Ireland Plc and Allied Irish Banks Plc surged in Dublin trading after the government said it will inject 2 billion euros ($2.8 billion) into each of them to protect the Irish financial-services industry from collapse. Photographer: Crispin Rodwell/Bloomberg News

International Monetary Fund and The European Union are in the process of sorting out a rescue package worth up to 100 billion Euros in order to bail out Ireland’s banking sector. But there are many questions arising in the minds of people around the world that how it is going to affect their lives. Specially people living in EU and the broader world that are directly affected by this developing situation. Maybe at one point there are doubts arising on the Euro or the European monetary union as well. How this bailout will affect the Irish people and how it will have implications on rest of the world?

It is too early to talk about the exact details of the bailout package as Brussels, Dublin and IMF are working hard to chalk it out. But in the coming next few weeks, we would be able to find out what is the exact size of the bailout as it will be revealed and we would be able to see the details of when it will take effect. It will also be important to see what sort of changes it will bring to Ireland’s austerity measures already in place. It is understood that the IMF will insist on in exchange for the facility.

The ball has already started to roll as on 24 November, Irish Prime Minister Brian Cowen revealed a tough four-year austerity plan, including a huge cut in welfare spending, a raising the Value Added Tax (VAT) rate, and on top of that thousands of redundancies in the country’s public sector. Most surprisingly Dublin stopped short of changing Ireland’s low corporate tax rate.

We all are well aware of the financial crises but why Ireland specifically needs money for and why it has significance? The answer is very simple Ireland’s banking sector was sinking something we saw in UK and many other countries and it needs funds to shore up balance sheets of the troubled banks after Dublin spend billions of Euros pumping them into Irish banks to keep them afloat, effectively nationalizing most of them. The most difficult part of this situation is that The European Central Bank is lending money to Irish banks because other banks won’t. To make this already bad situation worse lately companies and people have been pulling funds out of the banks. The situation has reached a level that this couldn’t have continued.

One wonder why we bother if this continues, let the Irish or European deal with this mess why we bother? The result could be a disaster in the shape of a run on Irish banks by people and companies, customers withdrawing en-mass as they would be worried that their bank might go bust. For EU it would be even bigger disaster that would cast serious doubts over Euro and Euro zone. The situation could even take a drastic turn as it could have forced the EU and IMF to scramble to provide emergency funds within days, rather than in the more orderly, considered way now being organized.

On the other hand if rising yields (interest rates) on bonds issued by the Irish government continue, the same would probably happen to bonds issued by countries such as Spain and Portugal. This as an affect weakens the banks finances in those countries (because their large holdings of Spanish and Portuguese bonds are growing less valuable), which will make them inclined to lend less, which finally is damaging for the economy.

Analysts believe that a bailout will not directly affect Irish citizens on the contrary it will have beneficial effects on them nonetheless. This in reality will only keep the banks going while they get the time to catch up with their books and balance them if they are on the right track. On the other hand it is not going to change the objective conditions for the average Irish people. Some analysts believe that a bailout will make ordinary Irish citizens life easier because the aid might lessen the severity of service cuts the government will need to make. Without this bailout money the affect of the austerity measures and cutbacks would be very harsh and sever.

On the other hands for Europeans it means that their tax money is going to pay for yet another bank bailout plan, after the recent EU 110 billion Euros (currently $150 billion). This bailout will calm the markets, already in turmoil recently due to escalating situation. This in affect takes pressure off from Spain and Portugal, both facing budget problems by bringing the interest rates on Portuguese and Spanish government bonds back to normal levels. So both the governments would end up paying less on interest and more, hopefully, toward reducing their own deficits.

Across the Atlantic the results might be in the shape of stock markets bouncing back and those who lost heavily could regain what they have lost in the past two weeks over “fears of European recovery.” On a different note dollar might start to fall against the euro, in affect boosting American exports to Europe, making American goods cheaper for Europeans to buy. Keeping in mind the festive season is just around the corner.

But the million-dollar question is that who will pay for this hefty bailout in actual terms. European Union countries pledged nearly $1 trillion for any country that can’t pay its bills by raising funds through normal debt markets, after Greece took European and International Monetary Fund loans. Dublin does not have that problem, because EU would not object Ireland’s attempts to pump loans into its banks as Dublin controls most of the banks now anyway. In the current European Union setup EU countries and their taxpayers pay according to their size: Germany due to its size pays the most and Malta being the smallest pays the least. Sweden and The United Kingdom both non-Euro countries have also said they will lend about 1 billion Euros and 8 billion Euros respectively, to Ireland.

Finally the question every one has in mind would there be any hidden affects or what sort of strings will be attached? It is estimated that after receiving this financial injection, Ireland’s fiscal deficit will climb to as high as 32 percent from the planned 11.75 percent of gross domestic product in 2010. It is still 10 times higher than the three percent allowed under the Maastricht Treaty agreed by the EU when it laid out the foundations of its single currency in 1992.

The worrying factor for Dublin in this post bailout scenario is that whether the EU and the IMF would demand that Ireland’s low level of corporation tax of 12.5 percent, which is one of the lowest in the EU to be raised. It is important to understand that this is one of the key factors making it competitive then other EU countries. Right now Ireland is holding fast to its principal position that it alone decides taxes, and decided not to touch the matter while chalking out its four-year austerity plan. The Irish Finance Minister will be reassuring the IMF and financial markets that it can deliver on his pledge to shrink the fiscal deficit back down to three percent of GDP in 2014.

Ireland as dubbed by “Celtic Tiger” in its peak era from around 1993 to 2007 achieved stunning growth before the global financial crisis hit. In a typical example of the credit crunch cases Irish banks, like others around the world, loaned risky money to people who in some cases couldn’t pay it back. This policy of cheap loans heated up the housing market and created extra demand for housing. While prices surged in the housing market the construction industry raced to build more to catch up. House prices went out of the roof during the period, enabling many homeowners impressive to gain quick profits and generating fat tax profits for the government. But it went till the housing bubble burst, consumer spending slowed sharply. During the coming period unemployment tripled from around four percent in 2005 to 11.8 percent in 2009, putting it currently at even higher at 13.7 percent.

IMF no matter how useful is never a welcome guest in any country and Ireland’s case is no different to this. With an extremely unpopular government and election ahead it is hard to see how the bailout will help in actual terms. As usual Irish people don’t want to see IMF running the budget show over the next couple of years. The quickly fading government of Prime Minister Brian Cowen is trying to reassure voters that this will not be the case, but his words like his policies are still to be seen in reality. Is this going to reawaken the “celtic tiger”? Only time will tell.

Note: This article was published in ICE Business Times Bangladesh

Written by tahir