The Arrival of the IMF in Ireland

In November 2010 Ireland formally accepted that it would be necessary to accept outside help in righting our public finances. But what are the reasons behind the Irish government's acceptance of assistance from the IMF, European Central Bank and European Union? Despite the fact that the Irish government was funded until at the very least the middle of 2011, the pressure to accept a bailout was almost irresistible. There were a number of factors that precipitated Ireland's ignominious downfall:

Ireland's own domestic problems 
Ireland's boom and spectacular bust is well documented. The collapse of the Irish economy was bad enough but poor regulation of the banks meant that most of our domestic banks borrowed recklessly on international money markets. In September 2008 the Irish Minister for Finance, Brian Lenihan, placed a state guarantee on the deposits of all Irish banks but he also extended that guarantee to the banks liabilities. The true extent of the Irish banks indebtedness only became clear during the following months and years. Compounding the situation was the constant drip feed of bad news about the size of the banks insolvency, particularly Anglo Irish Bank. It was soon clear that what was initially billed by the Irish government as the ’cheapest bank bailout in history’ was in fact probably the most expensive and the bankruptcy of the Irish state was not beyond the bounds of possibility. With such uncertainty about Ireland’s ability to pay her debts, bond yields (the interest rate that those who lend to the Irish state charge) increased spectacularly compared with those rates charged to more stable economies such as Germany making borrowings more expensive.

Careless talk 
In November 2010 Angela Merkel, the German chancellor, remarked that bond holders (those who lend to sovereign governments within the Euro zone) would have to share the burden of those countries who default. In the age of instant communication this was a disaster. The mere mention of debt sharing caused jitteriness on the markets and as a result bond yields for the fringe countries of the Euro zone Portugal, Ireland, Italy and Spain, rose sharply. Later clarification by Merkle and the EU that such a policy would only apply to bonds issued to Euro zone states after 2013 made little difference. The cat was out of the bag and increasing focus and scrutiny was now directed at the state of the Irish finances.

The Irish Governments own weakness
Since the financial crisis erupted, the Irish people have endured severe austerity measures to correct the public finances. However, it is clear that much tougher medicine is about to be administered to the Irish economy in the next four to five years compliments of the IMF and the ECB. At time of writing, the current government has a slender majority in the Dail (the Irish parliament). An extremely unpopular budget is therefore by no means guaranteed to be passed, as jittery members of the governing party, Fianna Fail may well opt to vote against such a budget to save their own seats. This has in recent months made lenders to the Irish state wary as markets are notoriously sensitive to uncertainty. It has been argued by a number of domestic and international commentators that had a general election been called some months before the arrival of the IMF and the ECB to Dublin, a strong government with a solid majority may have been elected with the strength of numbers to push through the necessary measures to correct the public finances. The markets would in all probability have responded to this scenario by lowering lending costs to Ireland and thus removing the necessity of outside interference in the domestic finances of the Irish state. But, it seems, the current government, who largely created the Irish fiscal mess to start with, were determined to hang on to power at all costs.


Pressure from the EU to save the Euro zone at all costs
Unlike Portugal and Spain Ireland was perfectly funded until the middle of 2011. Additional funds held in a pension reserve of some 25 billion Euro that could, should Ireland be unable to source affordable additional funding, have kept the state afloat until early 2012. However, bond yields being charged to Portugal and Spain were becoming unaffordable. The risk of Spain, a far larger economy that would require many multiples of what Ireland received by way of bailout, was a burden that might well be too much for the European Central Bank to absorb thereby threatening the whole future and viability of the Euro. In order to calm the markets, the EU and the ECB needed to demonstrate that they were willing and able to intervene where necessary to rescue Euro zone members. At time of writing this policy of sacrificing Ireland to calm the markets has had a very limited effect.