The finance ministers from the euro-zone countries met in Brussels today in an emergency meeting to approve the proposed financial bailout for Ireland and to discuss plans for dealing with future euro-zone financing crises. A joint loan from the European Union (EU) and the International Monetary Fund (IMF) has been approved by the finance ministers and it is expected to be valued at €85 billion ($110 billion). The finance ministers also agreed in principle to a proposal favored by the leaders of France and Germany for how to deal with future crises. Under the proposal, private bond holders would be required to share the burden of a sovereign debt restructuring of a euro-zone country. Creditors of euro-zone countries that face insolvency after 2013 would have their bond holdings restructured by an extension of debt maturities, rescheduling of payments and/or a reduction in the value of their investments. Creditors could be forced to take losses so that the costs of a financial bailout of a euro-zone country would not fall completely on the shoulders of taxpayers. To date, the euro-zone bailouts have been the responsibility of taxpayers, which has triggered increasing public anger. Over the weekend, thousands of people in Dublin protested against the government’s proposed budget cuts. The Irish government has proposed an austerity budget designed to save 15 billion euros over four years by cutting the minimum wage, reducing welfare benefits, eliminating public sector jobs, and raising taxes.
QUESTIONS FOR DISCUSSION:
- Evaluate the advantages and disadvantages of the proposal to force private creditors to share some of the burden of a sovereign debt restructuring of a euro-zone country. How would this proposal impact the cost of borrowing for weaker euro-zone countries?
- Government officials in Ireland face increasing public backlash of their handling of the current financial crisis. Given that similar protests resulted in several deaths in Greece earlier this summer, how should the government of Ireland respond to the current protests?
- The proposal under consideration for dealing with a future euro-zone bailout purportedly has the support of German Chancellor Angela Merkel, French President Nicolas Sarkozy, EU President Herman Van Rompuy and European Central Bank Chief Jean-Claude Trichet, but the proposal must be approved by the other EU countries. Given the way the euro-zone crisis has been handled up to this point, how likely is it that the current proposal will get universal support by the other EU countries?
RELATED ARTICLE: EU Outlines Bond Restructuring Plan. (Retrievable online at: http://online.wsj.com/article/SB10001424052748704700204575642270168946834.html)
Related Video Clip Available At: http://www.euronews.net/2010/11/28/irish-bailout-agreed-in-brussels/
Related Video Clip Available At: http://www.reuters.com/news/video?videoId=164528349
Related Video Clip Available At: http://www.reuters.com/news/video/story?videoId=164369751&videoChannel=5