Update: I deleted a couple of sentences about requesting some sort of compensation for the use of American taxpayer dollars in the bailout of Ireland. That was way over the top and was a major mistake in hindsight. I apologize for anyone who read that and was offended. The Irish people face a terrible situation and don't need me to put salt on the wound.
Yesterday European leaders and the Irish government announced the terms of Ireland’s bailout. The terms of the bailout look very troublesome in the short-term and long-term for Ireland and for Europe. Before I explain why here is a brief overview of the key terms associated with the bailout agreement:
- Ireland is receiving €85 billion (or $113 billion) and is being charged a 5.8% interest rate overall for the bailout. Ireland has seven years to repay the loan.
- The International Monetary Fund (IMF) is lending €22.5 billion (or $29.72 billion) in the bailout. Since the U.S. contributes 17.09% of the IMF’s money, U.S. taxpayers may be responsible for paying $5.08 billion to bailout Ireland. If you divide that amount by the U.S.’s estimated population (307,006,550 people), each American-man, woman, and child-may be contributing approximately $16.55 to the bailout of Ireland.
- Ireland’s main pension plan is responsible for contributing €12.5 billion (or $16.55 billion) in the bailout. The Irish people are furious over this detail and I wouldn’t blame them. I would be too... In addition another €5 billion (or 6.6 billion) will come from Ireland's cash reserve
- If you remove the pension fund’s contribution, one estimate found that the European Union (EU) is charging a ridiculously high 7.25% interest rate for their contribution to the bailout. If the EU is receiving this high of interest rate it means that they either view Ireland as an extremely risky country to lend money to or they are trying to rob the Irish people.
- Even though Britain is exempt from participating in the bailout (as they do not own use the Euro), they are contributing €7.9 billion (or $10.46 billion). British students and other Brits angry with the country’s developing austerity program have another reason to riot.
Like Greece, the bailout of Ireland is unlikely going to help the country resolve its debt issue. Recently an Irish professor who predicted that Ireland would fall into great economic difficultly earlier this year wrote that the Irish economy could not even afford paying even a measly 2% interest rate. Therefore, a 5.8% overall interest rate is too burdensome for Ireland.
- The difficulty Ireland faces with a burdensome interest rate is akin to your credit card company charging you a ridiculously high interest rate when you are struggling to pay down the staggering amount of money you owe them.
The main short-term consequence of the way this bailout was handled is that it is going to make people increasingly nervous about the EU leaders’ ability to contain and resolve the European sovereign debt crisis.
- Today a few key financial indicators show that people have very little confidence in the new bailout’s ability to resolve Ireland’s problems and have become less confident in Europe’s ability to stop problems from developing in other heavily-indebted countries like Spain and Portugal.
We are likely going to soon see people become extremely nervous about the increasing likelihood that Spain and Portugal will both need bailouts and whether the EU can provide the funds for these countries when it currently does not have enough money in its rescue fund for a bailout of both countries.
- The outcome of what the EU does with Spain and Portugal may determine how likely the Euro and the EU can survive because extraordinary coordination and action is likely needed to deal with these two (the EU is going to need a massive amount of money to bailout Spain because it is one of the world’s top ten largest economies).
Another short-term consequence of the bailout is that it is likely going to increase people’s dislike/distrust of the EU. The Irish people are likely going to develop a hatred of the EU for requiring Ireland to accept a harsh bailout agreement even though the Irish government had money to deal with its obligations through the early part of next year. In addition, the Irish people are likely going to detest taking orders from EU officials like EU Commissioner Olli Rehn, who Zerohedge refers to now as the "Overlord of the Emerald Isle" after Ireland's bailout. Meanwhile, Europeans living outside of Ireland are likely going to dislike/distrust the EU and individual European governments even more since their tax dollars are being directed to bailout a different country at a time when countries throughout Europe are attempting to reduce benefits.
- Imagine being a college student going to school in Britain. The British government recently announced that the cost of your college education is going to triple as part of a program to help the British government decrease the country’s massive deficit (by increasing revenue). The British government tells you that everyone must make sacrifices to help reduce the country’s debt, yet all of the sudden it lends Ireland billions of British pounds. You would be enraged because those billions in British pounds could have been used to help keep your cost of education low instead of bailing out people in a different country.
In the long-term, the bailout has increased the likelihood that Ireland is going to see massive civil unrest and perhaps revolution. The Irish government is perceived as having capitulated into accepting a bailout that the majority of Irish people did not want. The detail that the Irish pension plan is also contributing to the bailout is also likely going to increase dissatisfaction against government authorities because people do not like to see their pension money seized like that.
Outside of Ireland, European leaders’ willingness to engage in austerity, accept a bailout if one is offered, and provide additional funding for more bailouts have likely decreased. The Irish government has enacted severe austerity for the past couple of years-risking its own survival in the process-and they still ended up having to accept a bailout. After accepting a bailout the Irish government now must deal with a very angry populous who is likely going to throw them out of power for accepting the bailout soon. Meanwhile, European leaders outside of Ireland now are dealing with a growing number of people who are angry and fed up with seeing their tax dollars being sent elsewhere.
- As a consequence, the likelihood of a massive Pan-Europe money printing campaign in the long-term has increased. Europe is running low on political will and money to engage in further bailouts. The European Central Bank (the EU’s version of the Federal Reserve) can provide additional funds through money printing, but with that could bring a new set of problems (like angering Germany and risk destroying the Euro’s value). However, with European elites desperate to keep the EU together they may have no choice but to print money eventually.
- With the increased likelihood that Europe may eventually turn to money printing, the likelihood that we’ll see a period of major currency devaluation globally has increased, an event that is predicted by the spiritual forces of evil and is biblically possible.
I have an analogy for people who still have difficulty understanding what is going on in Europe. I compare Europe’s sovereign debt crisis to financial cancer. European leaders have tried to contain and eradicate the cancer with its bailout of Greece and its new bailout of Ireland. The treatment that the European leaders have applied to Greece and Ireland is insufficient to stop the cancer from threatening to spread to Portugal and Spain. European leaders must prevent the cancer from infecting Spain and Portugal or they risk facing a point of no return. If European leaders cannot stop the cancer from spreading to Spain and Portugal all of Europe may eventually be infected by it and perhaps eventually the world.
I do not think the importance of what is unfolding right now in Europe can be overestimated…
