The Euro Zone gets desperate to push Ireland into a bailout deal

11/15/2010 2:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Take this bailout money, please.

The European Union is so anxious for Ireland to take a bailout package that it’s offered to sweeten the deal.

The Irish government so far has said it doesn’t need a bailout yet since the government debt is funded through mid 2011. And it would prefer to see if an even more austere austerity budget to be announced on December 7 would be enough to restore the bond market’s confidence in Irish government debt. It may seem odd that Ireland would turn down billions in bailout funds but avoiding a bailout would leave Ireland, instead of the European Central Bank and the International Monetary Fund (IMF), in charge of Ireland’s financial policies.

But with the Greek crisis threatening to go from simmer to full boil, the European Union desperately wants stability in the financial markets for Ireland NOW. Don’t need the money now to finance government debt? So how about using the funds from a bailout package to support Ireland’s troubled banks? the European Central Bank proposed today. The European Union rescue fund can’t lend directly to Irish banks, the European Central Bank has noted, but the Irish government could use bailout money for that purpose.

If Ireland doesn’t take up this offer, the pressure will intensify at a meeting of Euro zone finance ministers scheduled for tomorrow in Brussels. It’s like that Ireland will be offered other inducements to take the bailout. And certainly they’ll add up to more than a toaster.

Why is the European Union so anxious to get an Irish deal done?

Look to today’s news that the Greek budget is in worse shape than anyone thought—again.

Revised numbers from Eurostat, the European Union’s accounting division, showed that Greece’s 2009 deficit wasn’t 13.6% as thought earlier but actually 15.4% of the country’s GDP.

That means that the budget cuts and tax increases that were part of the bailout deal Greece worked out with the European Union and the IMF in mid-2010 won’t be enough to meet the deficit targets in that $150 billion rescue. The Greek government had projected that measures it had put in place would be sufficient to reduce the Greek budget deficit to 7.8% in 2011 and 7% in 2011. The new data from Eurostat has led the Greek Finance Ministry to revise its estimate of the budget deficit to 9.4% of GDP in 2010.

Even before the revisions the bond market had its doubts about the country’s ability to reach its goal—and the European Union’s deficit limit-- of reducing the deficit to 3% by 2014. And the Greek government doesn’t have much room for maneuver. The government barely survived regional elections last week and further budget cuts or tax increases could push it out of power.

That would present the European Union with a return to a full-fledged crisis in Greece and raise fears that the euro is on the road to unraveling.

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