This looks very much like the end of the beginning of the slow motion train
wreck that may undermine first the Euro and ultimately the USD with
completely unpredictable consequences in all directions...
Bets on how long it will take for all this to unravel... i.e.
Ireland-->Portugal-->Spain-->Euro Crisis-->USD crisis (my bet is less than a
year...
M
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Ireland vows austerity but plan draws skepticism
Reuters
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Video:Obama Appointee on the Hot Seat FOX News
By Padraic Halpin and Carmel Crimmins Padraic Halpin And Carmel Crimmins -
38 mins ago
DUBLIN (Reuters) - Ireland promised on Wednesday to cut spending and raise
taxes to combat its banking crisis and secure an international bailout, but
drew accusations of overconfidence in assuming the crippled economy can
grow.
As tempers flared across Europe over the financial and social cost of
rescuing Ireland, German Chancellor Angela Merkel said politicians must show
financial markets who is in charge and make investors share in the risk of
future debt crises.
Irish Prime Minister Brian Cowen, whose government is close to collapse,
unveiled a 15 billion euro ($20 billion) four-year austerity plan that he
said would affect all Irish people.
"The size of the crisis means that no one will be sheltered from the
contribution that has to be made toward national recovery," Cowen told a
news conference.
The plan includes thousands of public sector job cuts, phased-in increases
in Ireland's value-added tax (VAT) rate from 2013 and social welfare savings
of 2.8 billion euros by 2014, but does not touch the country's ultra-low
corporate tax rate.
The EU's monetary affairs chief Olli Rehn said the austerity plan would help
to stabilize Ireland's public finances. "The plan strikes a good balance of
durable expenditure and revenue measures, with due regard to protecting the
least well off," he said in a statement.
But almost immediately the credibility of the plan, which is vital for
meeting the terms of the IMF/EU rescue package, came into question for
sticking to economic growth assumptions unveiled earlier this month to
widespread skepticism.
Credit rating agency Standard and Poors said Cowen's government was too
optimistic in assuming growth and the Irish economy would struggle to expand
at all in the next two years.
Dublin forecasts real GDP will grow an average 2.75 percent from 2011 to
2014. But S&P said nominal GDP -- not taking inflation into account -- would
be close to flat in the next two years. "There is a meaningful difference,"
said Frank Gill, director of S&P's sovereigns rating group EMEA.
S&P cut Ireland's credit rating on Tuesday and put it on negative watch,
saying it was likely to need to inject more funds into the banks, hit a
property market collapse in 2008 which forced the government into
guaranteeing their liabilities.
Others were also wary. "It doesn't seem all that realistic to me," said
Stephen Lewis, chief economist at Monument Securities. "It seems they're
planning very stringent fiscal measures and yet they expect the economy to
grow against that background. That seems highly unlikely.
POLITICIANS LACK COURAGE?
Investors have sold off Irish debt, particularly since German Chancellor
Merkel raised the possibility earlier this month that state bond holders
might not get all their money back in future were another debt crisis to
strike.
Merkel renewed her calls on Wednesday, defying criticism that she risks
upsetting investors at a time when many fear a crisis which began in Greece
earlier this year and moved to Ireland, might spread to other euro zone
countries.
"Have politicians got the courage to make those who earn money share in the
risk as well? Or is dealing in government debt the only business in the
world economy that involves no risk?" she asked the German parliament.
"This is about the primacy of politics, this is about the limits of the
markets," said the chancellor, acknowledging that her insistence on this
issue was making markets nervous.
Merkel is talking about future government bond issues but holders of current
Irish debt fear the risk of default.
Dublin's 10-year bonds are trading far below their face value, at less than
75 cents in the euro. On Wednesday they yielded 9.23 percent -- a level at
which Dublin could not realistically issue news bonds, and far above the
2.63 percent on the equivalent German bond.
By contrast, Ireland is expected to be pay about five percent on loans from
the International Monetary Fund.
The euro, which has fallen sharply in recent days on fears that Ireland's
debt and budget crisis would spread to other euro zone countries such as
Portugal and Spain, barely moved after the austerity plan.
The plan is a condition for EU/IMF aid under negotiation for a country long
feted as a model of economic development and now the latest casualty in the
16-nation common currency bloc.
Cowen told parliament no final figure had been agreed for EU/IMF assistance,
"but an amount of the order of 85 billion (euros) has been discussed".
A CURSE FOR GENERATIONS
The sudden implosion of Ireland's economy has bewildered its people.
Unemployment -- a curse for generations of Irish which had almost lifted in
the boom years -- has leapt to about 14 percent from about 4 percent in just
a few years.
Anne Fullham, a 44-year-old property lawyer who lost her job in March, never
dreamed she would find herself taking benefits. "When I was growing up ...
it was the safest job you could possibly have -- if you're a doctor, a
lawyer, an architect. And now the architects and the lawyers are in
trouble," she said.
"We still all laugh about it in such a way that if you didn't, you'd cry,"
she said.
A Reuters poll on Wednesday showed that 34 out of 50 analysts surveyed
believe Portugal, where unions held a general strike on Wednesday, will be
forced to follow Ireland and seek a bailout.
If that occurred, fears about Spain would grow and investors could begin to
worry about the future of the currency zone that was set up over 11 years
ago and regarded as a major success in its first decade of existence.
Slovak Finance Minister Ivan Miklos added to the gloom, saying that "the
risk of a euro zone break-up, or at least its very problematic functioning,
is very real".
The Irish Independent newspaper said the situation was so critical that
Dublin could pump extra cash into the ailing banks as early as this weekend.
An erosion of support from the government coalition partners this week means
Cowen is unlikely to survive in office much beyond the New Year to implement
the plans.
But his successor's hands will be tied by the terms of an agreement to be
signed with the EU and the IMF, and Ireland's financial crisis will leave
little scope to revise them.
(Additional reporting by Jodie Ginsberg, Lorraine Turner and Steve Slater in
Dublin, Stephen Brown in Berlin and William James in London; Writing by Paul
Taylor, Noah Barkin and David Stamp; Editing by Louise Ireland)
(Dublin newsroom)
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