The weakness about the EU bailout procedure

The speculations have proven to be true: Ireland has asked the EU for receiving financial help. The state is determined to restructure its ailing banking system. Nonetheless, one could feel uneasy about the rescue…

In the last few weeks, we have blogged about the panic on the markets due to Ireland’s economic crisis (BNF 1) as well as its effects on bond prices (BNF 2). After days of hysteria, Ireland has finally applied for a loan by the EU and therefore needs at least 50 billion Euro. For a comparison: Ireland has a GDP of 160 billion Euro (ard.de). A Bloomberg report describes why Ireland’s last step seemed inevitable:

The aid, which Irish officials said as recently as Nov. 15 they didn’t need, marks the latest blow to an economy that more than doubled in the decade ending in 2006. The bursting of the real-estate bubble in 2008 plunged the country into a recession and brought its banks close to collapse. With Irish bond yields near a record high, policy makers are trying to keep the crisis from spreading.”

So far so good. But one could doubt that the EU lending process is too lax and thus might be threatening its effectiveness.

The major reason for this worry could be based on the fact that the granting of EU loans is not bound to certain measures which must be taken within the banking system – although these loans only have indirect effects (see the report “Wie funktioniert die Irland-Rettung?“ by German news channel ARD).

If the Euro-Nations would really like to make sure that these loans bring along the desired effects for Ireland, they should perhaps connect their lending to concessions made by the Peripheral.

Until now, one could be bothered as the lending process may give the impression of a “usual” credit application procedure – But it is not about a loan for a car, but about a loan for a whole economy which needs to function properly for the good of all Euro nations.

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4 Responses to The weakness about the EU bailout procedure

  1. rudi2020 says:

    Bailout for EU’s sake but Irish people have a different perspective here:

  2. bravenewloock says:

    Great one! Kornelius Purps from Unicredit points out that there is a fundamental difference between Greece and Ireland: Greece’s problem stems from decades of overspending, whilst the Irish problem resulted from an out of control banking and real estate sector after decades of strong growth. Thus, I think that it is easy for the EU demand harsh deficit cuts by Greece – demanding regulations for the Irish banking sector is incredibly more difficult if not impossible, as these regulations would have to be adopted by the other EU countries as well! And who would want that…!

  3. Pingback: Estonia introduces Euro as main currency 1/1/2011 | BraveNewFinance.

  4. Well, I think that Kornelius Purps pointed out the different roots for the misery of both economies quite well.

    These days, it sounds to me that these economies will go through a vicious cycle if they will not be taken under the “EFSF umbrella”.

    The market temper gives a very clear picture of how investors tend to think about their miserable states:

    a) Should an economy like Greece stay on its own with out financial help, then they will face even greater problems to refinance themselves and to reduce their debts at all.

    b) Should Greece be granted financial help by more favourable conditions (i.e. the EFSF demands an interest payment less than the rate which Greece would have pay on the market for bonds), then the economy will soon experience the market panics to be put off soon.
    This is because investors tend to reason on short notice – whenever these economies will be able to finance themselves with little risk, then investors believe the storm is over. No matter, how an economy might have gone rid off it’s refinancing risk.

    In respect to the above mentioned term “vicious cycle”, I was thinking of the latest news concerning Greece’s downgrade by all three major rating agencies.

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