After days of resisting rising international pressure, on Sunday Ireland officially applied for an IMF and EU bailout worth tens of billions of euros. The terms of the package are still being negotiated, but the bailout package would be used to address the nation’s ailing banking industry and rising public debt. Ireland had been hesitant to accept international financial assistance due to concerns about any “strings” which would come with the bailout package and concerns about how global investors might react to any bailout. Other European countries were eager for Ireland to accept international assistance due to concerns about how Ireland’s financial crisis could spill over to impact other euro-zone countries. No exact figures were announced on Sunday, but the package may be in the high double-digit billions.
QUESTIONS FOR DISCUSSION:
- The term contagion is used to describe when significant economic crises in one country spread to other countries. One of the reasons EU government leaders were placing pressure on Ireland to accept a bailout is because the value of the euro was being negatively impacted by the troubles in Ireland. Ireland is the second euro-zone country to receive an international bailout this year. To what extent do you think that this second bailout will avoid further contagion versus make it so investors become even more concerned about the possibility of yet another bailout in other weak euro-zone countries such as Portugal or Spain?
- Evaluate the extent to which you believe that the mere act of creating a contingency fund for Ireland will be enough to calm investor fears and to stop the drain on deposits which are squeezing Ireland’s banks. Is it possible that Ireland may never need to draw on the funds, or at least not all of the funds?
- Loans from the IMF generally have conditions or “strings” attached. For the first euro-zone bailout, the IMF and EU imposed substantial budget cuts on Greece, policies which have been met with public protests and violence. Give that Ireland has already slashed its budgets and has implemented other reforms, would further spending cuts be beneficial or detrimental to its economic recovery?
- Irish Finance Minister Brian Lenihan stated on Sunday that an increase in Ireland’s corporate tax rate of 12.5% was “off the agenda” as a condition of a bailout package. Critique the advantages and disadvantages of Ireland increasing its corporate tax rate to be comparable to the other euro-zone countries.
SOURCE: Ireland Applies for Bailout (Retrievable online at: http://online.wsj.com/article/SB10001424052748703567304575628362883493310.html?mod=WSJ_hp_LEFTTopStories)
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