Ireland finalizing austerity plan to secure EU/IMF bailout

Investors to watch for decision on Irish tax rate

  @ibtimes on November 23 2010 10:42 AM
Ireland austerity plan draws scepticism
Irish Prime Minister Brian Cowen (2nd R) speaks during a news conference on the steps of Government Buildings, in Dublin November 22, 2010. REUTERS

The Irish government is busy finalizing an austerity plan that is expected to save about 15 billion euros, even as the opposition called for early elections in January.

Ireland's Prime Minister Brian Cowen said he would stay in office till a budget, which would secure the IMF/EU bailout, would be passed by the Parliament.

Ireland, which was one of the first countries in the European Union to enter recession, asked for a bailout from the EU and the IMF on Sunday. The country now needs to launch a budget plan that will ensure enough savings to convince the EU/IMF, like the Greeks did in May this year.

Moody's Investor Service said this was an important step to restore confidence in the Irish banking system.

Such capital injections would alleviate the short-term funding problem the banks currently face, Dietmar Hornung, a senior credit officer at Moody's, said in a note.

However, he expects the aid package from the EU and the IMF to shift the burden of support to Ireland, result in more bank-contingent liabilities on the government balance sheet and increase the country's sovereign debt burden.

Though no details regarding the bailout package have been announced yet, media reports estimate it to be around 80 billion to 90 billion euros, which would be similar to the package Greece received earlier this year.

Ireland has a plan in place to ensure savings over the stipulated period. However, EU and IMF negotiators may demand further budget cuts, Jay Bryson, an economist at Wells Fargo Capital, said in a note.

Of special interest will be the fate of Ireland's low corporate tax rate, which currently stands at only 12.5 percent, he said.

The EU countries that were opposed to the low tax rate may now demand an increase in the rate before they agree to pony up any money for the Irish Republic, Bryson added.

However, the Irish government stated that the tax rate would be left alone at this point. Most of the cuts are expected to be in social welfare, reforming some of the tax system with new taxes in property and water.

The increase in debt levels in Ireland could also affect the country's debt rating.

A multi-notch downgrade, leaving the rating of the Republic still within the investment-grade category, is now the most likely outcome of our review of the sovereign credit, Moody's, which had announced a review of Ireland's Aa2 rating in October, said.

Details of the exact bailout package should be out in a couple of weeks. Media reports state that the severe austerity cuts could lead to riots in Ireland, like in Athens earlier this year.

Several other regions in the EU remain in deep debt.

Bryson believes Portugal could also be eventually forced to seek a rescue package, along with Spain, who could be forced to go the bailout way if government yields remain elevated.

The EU/IMF facility is large enough to handle Greece, Ireland and Portugal. However, a Spanish bailout would stress the facility due to the sheer size of any rescue package, Bryson added.

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