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Taoiseach Brian Cowen and Minister for Finance Brian Lenihan at a press conference in Government Buildings, Dublin, announcing the Government's request for an EU/IMF bailout of Ireland, Nov 21, 2010.
A week after Irish ministers had vehemently denied that talks were taking
place on aid support, Ireland on Sunday joined Greece as the two countries of
the 16-country Eurozone to agree during the global financial crisis to a bailout
from Europe and the IMF (International Monetary Fund). The bailout is expected
to total €80bn-€90bn and will include contributions from the UK and Sweden,
according to reports.
At a press conference in Dublin, Taoiseach Brian Cowen said: “The European
authorities have agreed to our request. A formal process of negotiation will now
commence that will lead to the provision of assistance on the basis of programme
to be negotiated by the government with the European Commission and the
International Monetary Fund in liaison with the European Central Bank. I expect
that agreement to be finalised shortly, within the next few weeks.”
The corporate tax rate of 12.5% is not an issue that will be discussed while the four year plan for adjustment of the public finances in the period
2011-2014 to reduce the budget deficit to 3% of GDP by 2014, will be published
on Tuesday. It will include provision for increased taxes and reduced spending
but it's not clear if the adjustment in the Dec Budget will be greater than
€6bn, which has been already flagged.
“Irish banks will become significantly smaller than they have been in the
past, so that they can gradually be brought to stand on their own two feet once
more,” Cowen said and added: "The agreement will include a fund for
potential future capital needs of the banking sector. Put simply, the Irish
banks will become significantly smaller than they have been in the past so that
they can gradually be brought to stand on their own two feet once more.
The second key element of the agreement will be a programme to reduce our budget
Again, put simply, the Government has to increase our taxes and reduce our
spending to levels we can afford.
In order to help Ireland complete these essential tasks, and to safeguard the
stability of the euro area, we will receive funding which we will repay over
Minister for Finance Brian Lenihan stressed to the journalists, which
included many from overseas, positive underlying aspects regarding the Irish
economy: "There are underlying fundamentals in the Irish economy which are
very, very sound. We have seen a 6% increase in exports year on year this year.
It is estimated that our balance of payments will move into surplus next year
and when you aggregate our public and private sectors we will be paying our own
way in the wider world."
Central Bank governor Prof. Patrick Honohan said in a statement: "This
evening’s announcements allow the course of economic and financial policy to be
set on a more secure path. We can be reassured that the Irish banking system
retains the support, not only of the Central Bank of Ireland, but of the
Dominique Strauss-Kahn, Managing Director of the International Monetary Fund
(IMF), issued the following statement Sunday on Ireland: “I welcome the
response from the European Union and euro-area Member States to the Irish
Government's request for financial assistance to safeguard financial stability.
“At the request of the Irish authorities, the IMF stands ready to join
this effort, including through a multi-year loan. An IMF team, currently in
Ireland for technical talks, will now begin to hold swift discussions on an
economic program with the Irish authorities, the European Commission, and the
European Central Bank.”
Besides approving the bailout request, the Cabinet also agreed the four-year
plan which Cowen said would involve €10bn of cuts and €5bn of new taxes between
now and 2014. The plan includes a €1 cut in the minimum wage, a 10% cut in
social welfare over four years, as well as an agreement to reduce public sector
numbers by 28,000. It is also expected to include provision for a property tax.
Brian Lenihan insisted that the Croke Park deal on public service reform would stand
- - but could only
guarantee it for 12 months.
Although the cuts of 28,000 public service jobs include 5,000 voluntary redundancies already
sought by the HSEn (Health Service Executive), it compares with the 14,000
identified in the Croke Park agreement.
A new levy is expected to be announced for
public sector pensions, of a similar percentage to the levy
imposed on public sector employees in the emergency budget in
Some of these pensions are lavish in particular for politicians and senior civil servants; they are linked to current pay and are often conveniently conflated with the old age pension.
Pensions now account for 12.9% of the total public sector Pay and Pension Pay
bill, up from 9% in 2005. Overall, the pensions bill has increased from €1.35bn
in 2005 to €2.23bn in 2010 representing a 65.6% increase over the period (pay in
contrast rose by 10.8%).
Irish domestic banks account for 20% (up to €100bn) of the European Central
Bank's (ECB) short-term facility which is part of the emergency liquidity
funding the central bank put in place after the onset of the credit crunch.
The ECB plans to run down this emergency facility and it didn't want to be a
long-term funder of Irish banks.
The banks have to provide collateral for ECB borrowing but €20bn was also
provided by the Irish Central Bank since August, which signalled that the banks
have problems both with collateral and rolling over their bond debt. On Friday,
Allied Irish Banks disclosed that it had an outflow in 2010 of €13bn worth of
The EU/IMF support mechanism includes a €60bn fund backed by the EU budget; the
European Financial Stability Facility (EFSF) amounting to to €440bn worth of
guarantees and €250bn from the IMF.