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Consequences of the Irish Bailout


Britain's unemployment rate, for one, will shoot up as workers migrate from the PIIGS nations and flood the UK market.

Editor's Note: This article was written by Nadeem Walayat, an editor for The Market Oracle. The full version of this article can be accessed at Market Oracle.

Ireland's government drops the mantra of no bailout by finally coming clean that a multi-billion euro bailout has been agreed ahead of markets opening on Monday. Many Irish citizens will be angry that they've been repeatedly lied to as a series of senior government politicians have stepped forward these past few weeks to make announcements that Ireland wasn't seeking a bailout, when the facts where the complete opposite, as an accelerating bank run was underway on Irish banks, with depositors having already pulled out an estimated 25 billion euro.

Emerging Bailout Details

The key bailout test was whether or not Ireland would retain its 12.5% corporation tax, which has attracted a number of giant multi-nationals to relocate there -- such as Google (GOOG), Pfizer (PFE), and Microsoft (MSFT) -- much to the annoyance of other European countries, especially France and Germany who had this at the top of their conditions hit list. The fact that Ireland has apparently retained sovereignty over the corporation tax bodes well for eventual economic recovery as the relocated multi-nationals account for more than 70% of Irelands exports and generate more than 50% in corporation tax revenues, without which Ireland truly would be bust for the next decade.
However, while Ireland can claim victory on capital gains tax, it did pay a heavy price elsewhere as it effectively handed over economic sovereignty to the ECB for at least the next three years.

  • EU financing of Irish government deficit for the next three years (40 billion euro).

  • International Bond Markets effectively closed to Ireland for the next three years.

  • Ireland's bankrupt banks to be fully nationalized (re-capitalization) then broken up (50 billion euro).

  • Ireland to enact further tax rises and spending cuts aimed at reducing the budget deficit to 3% of GDP by 2014.

Ultimately much of the bailout's debt will have to be inflated away by higher eurozone inflation (stealth debt default), especially as other PIIGS are also lining up for a bailout, coupled with restructuring of Irish banks' debts (outright debt default).

Bailout Was Inevitable

The Irish are trying hard to put up a brave face on the loss of sovereignty (as will Portugal and Spain soon) that they really don't need a bailout. However, Governor of Ireland's Central Bank Patrick Honohan gave the game away with his statement:

"There will be a large loan because the purpose of the amount to be advanced, or to be made available, is to show Ireland has sufficient firepower to deal with any concerns of the market, so we're talking about a substantial loan, tens of billions, yes."

The euro, stocks, bonds, and commodity markets leapt higher on the comments, all bouncing higher off their recent lows in anticipation of a 80 billion to 100 billion euro bailout in line with my going analysis that, given Ireland's bankrupt banks bankrupting Ireland, a bailout is inevitable.

Bottom Line: Where Ireland is concerned, the EU will do its best to delay the inevitable debt default, which means a eurozone bailout (one of a series) is imminent because if one of the PIIGS defaults then so will they all, which would require the mentioned 2 trillion euro quantitative easing bailout virtually immediately (a 750 billion euro bailout fund was announced in May), rather than perhaps 80 billion euro for Ireland on its own at this stage of the crisis. And after Ireland will soon follow Portugal, then Spain, then Italy before the bailout cycle returns once more for another Greece bailout (probably sooner rather than later). All of which feed the inflation mega-trend across the eurozone.

See also The Ultimate Shamrock Shake -- Is Irish Default on the Menu?

The press has been full of commentary of a bailout for Ireland as news, when it has been an inevitable eventuality given the fundamentals. (Graph now needs updating following developments of the past eight months).

Whilst the mainstream press these past two months has been obsessed with the Greek debt crisis, the above graph clearly illustrates that a far larger debt crisis looms in Ireland that could soon transplant Greece in the debt crisis headlines over the coming months, similarly a number of other eurozone countries head the risk toward bankruptcy league table with Belgium and Portugal not far behind Greece. The price that these countries pay for being stuck in the euro single currency is that they cannot devalue to try to gain some competitive advantage for their economies and therefore try to grow and inflate their way out of a high debt burden that stifles economic activity.
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