Ireland Accepts Aid – Euro Stabilizes
Over what has surely been a long weekend for Irish policymakers, the government finally caved -- accepting aid from the EU and IMF. The announcement stabilized the euro and caused the currency to gap higher against the U.S. dollar on Sunday. Foreign exchange traders have been counting down the hours to an Irish bailout for the past few weeks and now that it has become reality, a sigh of relief has swept across the financial markets.
On FX360.com on Friday, we said Ireland could receive a bailout as early as next week. “It is becoming increasingly clearer that Ireland will save face by asking for loans from the ECB and / or IMF and not a bailout. If this is the case then the EUR/USD’s reaction to the Greek bailout may not be a good representation of how the EUR/USD will behave after Ireland accepts aid. However if a bailout is opted for instead of a loan then a sharp move lower is still likely. In terms of a timeline, we could have an announcement as early as next week.” Of course Ireland will have to make concessions. In return for the loans, they will have to agree to massive budget cuts that would bring their budgets deficit back down to 3 percent by 2014.
My colleague Boris Schlossberg wrote a thorough note on the announcement this evening. Its definitely worth a read.
Euro gapped higher on the open of week’s trade after Ireland announced that it has agreed to accept financial support from EU and IMF. The funds will come from European financial stabilization mechanism (EFSM) and the European financial stability facility (EFSF) and will possibly be supplemented by bilateral loans to be negotiated by EU Member States. UK and Sweden already indicated that they stand ready to extend credit on a bilateral basis.
In return Ireland agreed to budget cuts of 6 Billion euros in 2001 and up to 15 Billion euros through 2014 with the target of reducing the budgets deficit to 3% by 2014. In contrast to earlier speculation Ireland made no concession on its low corporate tax rate keeping it at 12.5%.
The statement from the Ecofin/Eurogroup also noted that ,” The program will also include a fund for potential future capital needs of the banking sector. By building on the measures already taken by Ireland to address stress in its banking sector, a comprehensive range of measures – including deleveraging and restructuring of the banking sector will contribute to ensuring that the banking system performs its role in the functioning of the economy.” Read more on FX360.com