Faltering Banks Strain Ireland's Budget To Breaking Point, Bailout Next

Ireland announced that its budget deficit will rise to 32% of GDP, a number which is nearly unimaginable. It would be the equivalent to a $5 trillion annual deficit in the US.

The major cause of the increase is the need to bail out the huge Anglo Irish Bank Corp. That figure is now put at 29.3 billion euro. Ireland said it would need to reserve another 5 billion euro in the event that the bank’s losses grow due to economic conditions.

Ireland has cut its throat in the global capital markets although it clearly had no other choice.

Officials in Ireland and EU have said so far that the nation will not need a bail out, but it is impossible to see how that is the case. Ireland can’t cut national government expenses quickly enough to cover such a huge shortfall, nor can it sharply increase taxes. If taxes rise too quickly, the regressive effect could further damage the nation’s already delicate GDP recovery.

The other challenge, a nearly insurmountable one, is for Ireland to raise the money it needs in the capital markets which are likely to view the sovereign debt of the country as terribly risky. The cost to insure the nation’s debt has risen quickly and now has spread to the borrowing costs of more stable nations like Germany. Ireland will quickly reach the point were its future debt service will be so large that it will overwhelm the country’s ability to make its financial obligations.

The issue now is not whether Ireland will have to be bailed out by its neighbors and, perhaps, the IMF. The process for Ireland may not require the 110 billion euro needed to salvage Greece, but the number could certainly approach half of that if just one year’s deficit for Ireland is to be covered. Should its economy suffer further damage, the figure could rise well above 50 billion euro.

Europe faces its second sovereign nation bailout this year, and there will come a point when strong nations in the region like German and France will tire of the privilege of placing more money into countries that cannot right their own finances.

Douglas A. McIntyre