Monday, November 22, 2010

Ireland Gets Bailed Out

From Bloomberg:

Ireland applied for a bailout to help fund itself and save its banks, becoming the second euro member to seek a rescue from the European Union and the International Monetary Fund.

Irish Prime Minister Brian Cowen said he expects talks on the package to be completed in the “next few weeks.” Finance Minister Brian Lenihan said the loan will be less than 100 billion euros ($137 billion), though he refused to give any further details at a press conference in Dublin today.

“A small sovereign like Ireland faced with an outsized problem that we have in our banking sector, cannot on its own address all those problems,” Lenihan said. Ireland may not draw down on the entire loan, he said.

There are a few points that should be made here.

1.) Ireland tried austerity. I've linked (several times) to the NY Times article on the topic. What's illustrative is that austerity is a essentially cutting off your nose to spite your economic face. Government spending is part of the GDP equation (which is C+I+X+G). You can't lower a part of the equation and expect to get growth; it simply violates the basic concepts of additive math.

But most importantly, government spending can help the economy grow with expenditures like infrastructure, education and social safety net expenditures (which have a high multiple). The idea behind government spending in a downtrend is to 1.) limit the downside damage, and 2.) provide investment to enable the economy to start growing sooner and preferably at a faster pace. Ideally, the government spends appropriately and in a manner that allows the economy to grow its way out of the debt. BTW -- corporations do this all the time.

2.) Despite the politicking involved with this (will they take the deal, won't they take the deal, what will the deal look like) it should come as no surprise that Ireland eventually asked for help and it was eventually given. Allowing a sovereign to declare bankruptcy or fall apart would have catastrophic implications for the economy going forward.

3.) This should be euro positive and dollar negative.