Irish banking crisis: what now for Portugal and Spain?

Following the Irish bailout, the issue now concerning the Eurozone and beyond is which other countries may need help? Banking analysts have warned that far from solving the financial crisis the help being given to Ireland may only be a short-term fix.

ING Bank expert Oscar Bernal said: “Concerns that the Irish crisis spreads to other countries and threatens the euro remain vivid, as there still isn’t any formal crisis resolution mechanism in the eurozone beyond the European system of financial supervisors.

“In this respect, we doubt that markets will be comforted durably by the Irish bailout, which is likely to prove only a small and temporary victory.”

Who could be next?

Particular attention has been paid to the finances of Portugal and Spain, especially as only last week, Portugal, concerned about euro “contagion” affecting its weak economy, lobbied strongly for Ireland to apply for help with its economic problems.

And Portugal looks to be in a weaker position than its Iberian neighbour. Professor Iain Begg, professorial research fellow at the European Institute of the LSE told Channel 4 News Portugal’s situation is more fragile than Spain’s: “I would be more worried about Portugal than Spain.

“Portugal has had low growth and has been slow to implement the structural reforms that are needed to raise productivity, boost its competitiveness, and therefore provide the foundations for long-term growth. Its problem is a growth in private rather than public debt.”

He believes that Spain, which was in a stronger position as the downturn gathered pace, could be better placed to avoid a bailout.

“Spain’s economy on the other hand, is significantly less at risk,” he said.

“In Spain, banking regulation is pretty robust. The Spanish had a property bubble but one which had a different impact than that in Ireland as it affected the smaller savings banks rather than the big banks such as Santander.

“Also, Spain had one of the lowest public debts as a proportion of GDP as it went into the downturn. This means that it is better placed to be able to boost the public sector in order to stimulate growth in the private sector. It has also taken measures to liberalise its labour market which will help improve its competitiveness.”

The small print of Ireland's bailout deal is starting to emerge writes Channel 4 News economics editor Faisal Islam
Some details are emerging. A 10 per cent cut in social welfare payments, a 1 euro cut to the minimum wage, 28,000 public sector job cuts have all been concretely reported here in Dublin.
If the plan follows that of Greece, I would imagine that Ireland's 21 per cent VAT rate is also in peril, which will be music to the ears of supermarkets across the border. All of this effort is aimed at cutting 10bn euros of further spending and raising an extra 5bn euros of taxes by 2014, to close Ireland's gaping deficit. 
Intriguingly though, this is not a standard issue IMF hatchet job. Not yet. 
It seems that it is the Irish government has pre-emptively engaged in fiscal self-flagellation. As it stands, the IMF/EU is not about supersizing these cuts. But it will be monitoring, at least quarterly the progress of these policies.

Future for the Euro

In the longer term, questions have been raised about the viability of the euro. Professor Begg does not think the currency is in danger because “in all cases the euro is part of the solution not the problem”. Market reaction to the Irish bailout was positive; the euro rose in value against the dollar, reaching $1.3748.

But despite assertions by the UK government that bailing out the Irish economic system is fully in the interests of British business, critics remain to be convinced.

Sam Bowman, head of research at the free-market think tank the Adam Smith Institute, said: “The proposed bail-out for Ireland is a bad deal for the UK. It puts the interests of the European Union and the eurozone before the interests of Ireland, and the British government should have no part in paying for it.

“Asking the British taxpayer to cough up £7bn shows just how audacious the European Union has become in its desperation to keep the eurozone project afloat.

“The UK successfully avoided entering the eurozone. Ireland was not so lucky, but it entered in full knowledge of the risks involved. Bailing out Ireland now would undo much of the benefits that Britain has yielded from keeping the pound and would make a mockery of the spending cuts announced by the coalition last month.

“In the end, Ireland will have to choose its own path out of this crisis. But the British taxpayer should not be held responsible for past mistakes by Irish politicians.”

Economist Professor Geoffrey Wood from the Cass Business School in London, believes the future means some uncomfortable soul searching for the eurozone countries: “At some point doubts will develop about the stability of the whole euro project. These doubts can be eliminated in one of two ways; either the union will end (or contract to a core) or there will be sudden political and fiscal centralisation.

“Which is more likely? To answer that we have to move into the area of political discussion. The answer is not for an economist to produce. But it is clear that the answer involves responding to two questions: will Germany want to be in a union with some slow growing, fiscally irresponsible, members? And will some countries want to be in a united Europe in which they are no more than poor, subservient, and unimportant provinces?”