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Dec 02, 2010, 09.11 AM IST
Ireland faces years of scrutiny and strict outside controls in return for an 85 billion euro (USD 111 billion) bailout from the International Monetary Fund and its European Union partners, details of the package showed on Wednesday.
Prime Minister Brian Cowen agreed to an emergency three-year aid package on Sunday in a last ditch bid to shore up the country's financial sector and help halt fears Ireland's debt troubles could spread into the eurozone.
Under the deal, hammered out over 10-days in Dublin as the government fended off criticism for sacrificing national sovereignty, Ireland will have to give its creditors weekly updates on spending and revenue, according to a memorandum of understanding released by Ireland's finance ministry.
It will also have to introduce a "Fiscal Responsibility Law" with annual spending ceilings by the end of next year.
"We have been through a traumatic two years. Of course, we would have preferred to avoid resort to external assistance. But we can emerge from it a stronger and fitter economy," Finance Minister Brian Lenihan told parliament.
The IMF/EU deal has a detailed timeline for shrinking and recapitalising banks and getting the budget deficit under control, but analysts warned a general election likely early next year could hold things up something markets will not have much patience for.
"The risk is that around an election there would be some delay in the progress in some of these areas, and this (MOU) clearly points toward the need to push things forward," said Austin Hughes, chief economist with KBC Ireland.
A new government of the centre-right Fine Gael party and the centre-left Labour party looks set to take over from Cowen's administration, and while they agree with the overall fiscal targets, they have said they will re-negotiate some of the measures.
But in practice, they will have little room for manoeuvre.
Wave of negative sentiment
A disastrous property bubble triggered Ireland's financial crisis, bringing its banks to the brink of collapse and creating a huge hole in the public finances, which were overly reliant on property-related taxes.
A massive bill for propping up its banks will blow Ireland's deficit to an eye-watering 32% of gross domestic product this year compared with budget surpluses during the heady years of the "Celtic Tiger" economy.
Ireland is overhauling its tax system and pushing through tax increases and cutbacks totaling 15 billion euros as part of a four-year plan to get its deficit under control that will include a new property tax to be introduced in 2012 and increased in 2013.
Cowen and Lenihan need to pass the 2011 budget, set to be the toughest on record, in order to qualify for the first installment of funds from the EU and IMF and bilateral loans from the UK, Sweden and Denmark.
Lenihan said the IMF and the EU were endorsing measures set out in the four-year strategy, but their powers are wide-ranging.
Dublin must consult with the IMF, the EU and the European Central Bank if it wants to adopt policies that are inconsistent with the deal.
The central bank will be assessed by the IMF, an independent budgetary advisory council will be established and any unplanned revenue will be channeled toward debt reduction.
Under the agreement, Ireland will look at possibly selling its energy and gas assets and will make holders of bank subordinated debt pay for part of the bailout costs through discounted buybacks, which the memorandum said would start by the end of March next year.
In his speech to parliament, Lenihan reiterated that senior bondholders in banks would not be forced to pay up given the opposition of the ECB.
"The strongly held belief among our European partners is that any move to impose burden sharing on this group of investors would have the potential to create a huge wave of further negative market sentiment towards the eurozone and its banks system," he said.
Lenihan confirmed the government's forecast for GDP to expand next year by 1.75% despite the European Commission saying on Monday that it expected Ireland to grow at just 0.9% next year.
The EC expects Ireland to grow by 1.9% in 2012 compared with a government forecast of 3.25% and has given Dublin an extra year, until 2015, to control its budget deficit.
Tags: irish bailout, International Monetary Fund, European Union, Brian Cowen, eurozone, Ireland's finance ministry, Brian Lenihan, bilateral loans, European Central Bank
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