Bailing Out Europe
• Irish Times – Ireland to receive €85 billion bailout at 5.8% interest rate
The European Union has approved an €85 billion rescue package for Ireland which, if drawn down in its entirety today, would attract an average interest rate of 5.83 per cent. Of this €10 billion will be used to immediately to recapitalise the banks to bring them up to a core tier 1 capital ratio of 12 per cent, with a €25 billion contingency. The remaining €50 billion will be used to meet the budgetary requirements of the State. Ireland has also secured an extra year – until 2015 – to meet its target of reducing its budgetary deficit to 3 per cent as part of the agreement. Under the terms of the deal the State will contribute €17.5 billion of the required funding, €12.5 billion of which will come from the National Pension Reserve Fund and €5 billion from “other domestic cash resources”. The European Financial Stability Mechanism will contribute €22.5 billion, the IMF €22.5 billion and the €22.5 billion from the European Financial Stability Fund.
• The Wall Street Journal – Europe Sets Bailout Rules
Investors Face New Risk in Plan for Future Rescues; Ireland Seals $90 Billion Deal.
The Irish bailout, equivalent to about $90 billion, is intended as a signal that the euro zone will come to the aid of its own. But the plan to share pain with banks and other private-sector lenders is a message that the munificence won’t continue forever. Ireland is the second euro-zone country, after Greece, to call for help paying its bills. Bond markets have all but cut Dublin off by demanding soaring interest rates. They have also become more wary of lending to Portugal and Spain, stoking fears of toppling dominoes along the euro-zone’s weak perimeter. European finance ministers raced to reach an agreement before unsettled markets opened Monday.
• Bloomberg.com – Ireland Wins $113 Billion Aid; Germany Drops Threat on Bonds
European governments sought to quell the market turmoil menacing the euro, handing Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to bear some cost of future bailouts. European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders. The first test of the twin decisions came as markets resumed trading after speculation intensified last week that Portugal and perhaps even Spain will require support. German bunds, Europe’s benchmark, fell after the deals damped demand for the safest fixed-income assets. European stocks gained.
• The Wall Street Journal – Europe Tries to Contain Debt Crisis
The spread between Portugal’s 10-year bonds and bunds was 4.33 percentage points, compared with 4.53 on Wednesday, according to Thomson Reuters, and 3.71 as November began. Another concern, stoked this week by Bundesbank President Axel Weber, is that the cost of bailing out Ireland, Portugal and Spain could exceed the lending power European leaders built into the €750-billion ($1 trillion), three-year plan they laid out after organizing a separate package of aid to keep Greece from defaulting in the spring. In comments over two days in Paris and Berlin, Mr. Weber speculated about Portugal and Spain following Ireland into an EU aid package, saying that the euro zone would readily provide the funds to bridge any gap. The day before Mr. Weber spoke, the European Commission was floating a plan to double the portion of the three-year plan supplied by euro-zone governments, currently €440 billion, according to people familiar with the matter.
• The Financial Times – Wolfgang Münchau: Europe is edging towards the unthinkable
So how about some realistic suggestions? I think we have moved beyond a situation in which the “realistic” technical fix can do the job. If we had the luxury of not starting from here, as the Irish joke goes, a much less invasive solution could have been found several years ago. One could have constructed a system based on policy co-ordination. One could have established credible bail-out, default and exit rules. But the European Union chose not to act during the euro’s fair-weather decade. The longer you wait, the more radical the solution has to become. Today, the eurozone must deal with a simultaneous – and inter-acting – financial and governance crisis. The radical nature of my proposed solutions is merely a reflection of the mess we are in. So what is going to happen? The eurozone has only one strategy for now, the bail-out, shortly to be followed by the bail-in. Axel Weber, president of the Bundesbank, last week made a revealing comment when he offered his macro-arithmetic of the crisis. He said the various bail-out funds added up to €925bn. The maximal possible financial risk in the eurozone is €1,070bn, leaving a small gap of €145bn. The implication is that the eurozone would somehow find the petty cash to make up the difference in a worst-case scenario.
• Telegraph.co.uk (UK) – Roubini tells Portugal to seek bailout as markets slide
Mr Roubini, the economist who predicted the financial crisis, told daily paper Diario Economico it is “increasingly likely” Portugal will require international assistance. He said the country is approaching “a critical point” due to it high debt load and weak growth and there were ample funds to shore up Portugal, one of the eurozone’s smaller countries which contributes less than 2pc to the 16-nation bloc’s gross domestic product. However, he said neighboring Spain, Europe’s fourth-largest economy, is “too big to bail out.” The euro, which rose about $1.33 on news of the Ireland deal after trading at $1.3181 in Asian trade – its lowest level since September 21, fell back below $1.32 in morning trading in Europe. “The impact on the euro was stark,” said Mitul Kotecha of Credit Agricole, with the single currency “failing to hold its initial rally following the announcement”. The cost of insuring debt in Portugal, Spain, and Ireland continued to rise, while the cost of borrowing for the two southern Mediterranean nations also increased. Equity markets also fell across Europe, with Spain’s Ibex index down more than 1pc.
• MarketBeat.com (WSJ Blog) – Spain: A Quick By-The-Numbers
• The fourth-largest economy in the euro zone.
• Deficit-to-GDP in 2009: 11.1% (Ireland is 14.4%. Greece is 15.4%)
• Government spending as a percentage of GDP: 45.8%.
• Government debt-to-GDP: 53.2%.
• Unemployment rate: 19.8% in the third quarter. That is more than twice the European Union average, although the figure is down slightly from 20.9% in the second quarter.