Today, a team from the European Union, European Central Bank, and International Monetary Fund began scouring Irish financial records and data to determine the underlying strength of the Irish financial system, one that has been battered by high sovereign debt, a plummeting property market, repeated downgrades from top credit rating agencies, and an erosion of tax revenue.
The fact that Ireland has external debt worth approximately 1,300% of its GDP does not help matters, either.
The question of whether or not the shaky Irish financial system can withstand the stress and make it out of the hole it is in on its own is a pressing one, especially considering the other peripheral debt issues still unresolved in the euro zone. Formerly, the Irish Prime Minister, Brian Cowen, had denied that Ireland had made any formal application for a financial bailout from the EU.
Today, however, his Finance Minister, Brian Lenihan, spoke favorably towards a potential bailout, suggesting that the stricken country could very likely require “substantial contingency capital funding” for its central banking system.
If granted, such funding could ultimately cost anywhere from 40 to 90 billion euros, and would most certainly straddle Irish taxpayers with the burden of paying down a loan with an estimated 5% interest rate – similar to that granted to Greece in April.
Upon hearing the news, voters in Ireland expressed dismay and even outrage at the government’s actions, fearing that a bailout would straddle Ireland with even more debt on top of the monstrous external debt load it currently has.
At this point, the chances of Ireland receiving a bailout from the ECB and IMF is likely.
The general consensus in the currency market trading community is that the bailout could amount to 50 billion euros, which is approximately 33% of Ireland’s GDP. This is on top of a four-year, 15 billion-euro plan set to be announced by Lenihan that is designed to lower Ireland’s budget deficit.
Such a deal could also entail Ireland staying out of the sovereign bond market for some time, and even raising the country’s 12.5% corporate tax rate – a measure that the government has previously declared as “non-negotiable.”
Should Ireland be granted funding, it is likely that the euro will take a hit and drop in value versus the pound and dollar in the short term.