Irish government, seeking bailout, unveils $20 billion in spending cuts, taxes
Wednesday, November 24, 2010; 10:44 PM
LONDON - Desperate to seal a deal for an international bailout, the government in Ireland on Wednesday unveiled a painful, four-year plan for $20 billion in spending cuts and new taxes that would slash unemployment benefits and cut welfare payments for the already hard-hit Irish public.
The move came as the near-bankrupt government scrambled to show negotiators from the International Monetary Fund and European Union that it can cut spending and raise more revenue to meet the conditions of a $115 billion rescue package.
E.U. officials are eager for Ireland to close the deal quickly to ease concerns that troubled Portugal and Spain - two nations facing renewed pressure from investors - might be next in line for financial lifelines. Highlighting those fears, investors sharply accelerated dumping the bonds of those countries Wednesday.
At the same time, Ireland's situation became more dire, with the government of Prime Minister Brian Cowen teetering amid concerns it might not have the votes to push through the first part of the plan, an austere 2011 budget set to be presented to Parliament on Dec. 7.
The fragile government, meanwhile, was moving to prop up the nation's buckling banks by partly nationalizing the failing Bank of Ireland and almost fully nationalizing Allied Irish Banks, both of which have been hit by a run on deposits. Irish bank stocks plummeted Wednesday as investors continued to dump Irish bonds and the euro fell to a two-month low against the dollar.
Compounding the country's woes, Standard & Poor's on Wednesday cut Dublin's credit rating by two notches, citing worse-than-expected problems with the banks, which are weathering a slew of bad loans from a U.S.-style real estate bust. In addition, debt-saddled Ireland is now set to suffer through an even more prolonged economic downturn.
"With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent," S&P said in a statement.
In Dublin, the Irish government scrambled to sell the need for more belt-tightening to a public that has already gone through two years of cuts.
Under the proposed new austerity measures, taxes would go up, benefits would go down and the national minimum wage would be slashed. At least 40 percent of the $20 billion in cuts would be front-loaded, taking effect next year.
"This will ask a lot of all of our people," Cowen said as he unveiled the cuts. But, he said, the government needed to have a spending plan that is "affordable for the money that taxpayers are able to provide in the current circumstances."
Calming investor panic in Ireland - six months after Greece received a $140 billion bailout - is now considered pivotal to restoring calm in other economically troubled nations in the region. Without confidence that Ireland's situation will not deteriorate further, analysts say it might be impossible to prevent a broader debt crisis in the region that could destabilize the euro.
Portugal remained the most immediate concern, with analysts sounding alarms over its failure to meet targets to reduce government spending. But given Portugal's tiny economy, the more important issue continued to be conditions in Spain - the fourth-largest economy among the 16 nations that share the euro as their currency.
Though Spain's fiscal situation is far better than that of Portugal, Ireland or Greece, analysts fear its banks might be harboring hidden bad debts from a real estate crash similar to the ones in Ireland and the United States.
Simon White, a partner at the London-based research firm Variant Perception, said Spain's banks "are sitting on much larger losses than they are reporting." He noted that auditors of Cajasur, a Spanish savings bank, announced this week that losses stood at $1.15 billion, or four times what the bank had reported in June.
If Spain does need help, it could test the ability of Europe to rescue its own. Greece and soon Ireland will be aided through a $1 trillion contingency fund set up by the European Union and IMF this year to provide emergency aid to euro-zone nations in financial crisis. But with $140 billion committed to Greece and as much as $115 billion being set aside for Ireland, analysts said the war chest might not be enough to cover potential bailouts in Portugal and Spain.
"It is likely the [contingency fund] would be insufficient to bail out an economy as large as Spain's," White said. "Whether, ultimately, European policymakers do the more sensible thing and insist that bondholders share some of the burden for a bubble they helped fund - as [German Chancellor] Angela Merkel has already hinted may be the case - remains to be seen."
Special correspondents Rebecca Meehan in Dublin and Rebecca Omonira-Oyekanmi in London contributed to this report.