The Irish bailout explained

Economies all over the world have set their eyes on Ireland over the course of the week. For many, the decision that will be made by the European Union (EU) and multinational lending agencies will determine whether Europe’s “road to recovery” will continue or will face a standstill. Many ordinary citizens are now asking what really happened over there.

Ireland is one of the eurozone’s economic darlings in the past decade and for most part of this century. Economic growth was generally high from 1995 to 2007. When the global economic crisis erupted in 2008, the Irish economy contracted significantly and unemployment rose sharply.

Irish banks likewise suffered as in the case of other states in Europe during the crisis. The Irish central bank has been pumping cash into these banks to keep them afloat which in turn shore up the country’s public deficit.

The EU and the International Monetary Fund (IMF), aware that this condition if allowed to continue could potentially be perilous not only for Ireland but for other economies in the eurozone facing similar problems, offered to step in during these past few days. An emergency loan facility for Ireland amounting to an estimated 100 billion euros is expected to be announced any time soon.    

As expected, there are pros and cons for the bailout. Some analysts maintain that an “early” bailout could avoid further complications for Ireland and could stabilize countries like Spain and Portugal, which are also having debt problems of their own.

Skeptics of the plan, meanwhile, believe that Ireland will be left with no choice but to follow IMF-dictated austerity and revenue generating measures including increasing their generous corporate tax rates, one of the most competitive in Europe, in order to contain their ballooning fiscal deficit which is now expected to stand at a third of the gross domestic output after the bailout.

Markets in Europe, North America, and Asia are keenly anticipating how the drama will unfold. Since word has gone out that a bailout package is in the works, it has somehow assuaged the fears of many that the global economic recovery will take a little while more rather than sooner.

APEC leaders out to explore possibilities of the TPP

As the Asia Pacific Economic Cooperation (APEC) gets underway this weekend in Yokohama, Japan, there is one trade agreement that stands out in which participants are keen on inserting in this year’s summit’s working agenda.

The Trans Pacific Partnership (TPP) was given a boost by U.S. President Barack Obama as something that could lay the foundation for a free trade area in the Asia Pacific region. The TPP currently includes just four economies including Brunei, Chile, New Zealand, and Singapore but other major economies like Australia, Malaysia, and Vietnam are already in negotiations to secure membership.

President Benigno Aquino III hopes to get the Philippines an invitation in the negotiating table during the sidelines of the APEC summit.

Obama’s declaration of interest for the TPP could be a sign that America does not want to be left out of the free trade game led by China and ASEAN. With the Doha round of WTO talks still inconclusive, many analysts feel that the TPP is the only bright spot for free trade in a world economy seeing a rise of protectionist policies in recent weeks.

China poised to surpass Japan as world’s second-biggest economy

The New York Times ran an article last week about China’s potential to overtake Japan as the world’s second biggest economy by year’s end granting it can maintain its robust growth in 2010. The Chinese government announced last Thursday that the country’s 2009 fourth-quarter gross domestic product (GDP) rose by 10.7% due to strong industrial output and retail sales. The figure means the economy has grown 8.7% last year which easily beats Chinese economists’ estimates of 8% which the government admits is the threshold in keeping social stability in a country that has a population of more than 6 billion.

Despite concerns on inflation which might lead to tightening of lending and money supply in China this year, the economy is seen to grow by 9.5% this year according to Zhang Liqun, an economist at the Development Research Centre, a think-tank under the State Council. It is almost a reversal of fortunes for Japan, which for the last 40 years has held on an economic juggernaut that has rivaled that of the United States’. The Japanese economy is expected to shrink by 3% in 2009 but is seen to get back in the black in 2010 which the International Monetary Fund (IMF) forecasts to be at 1.7%.

The current row between the United States and China regarding the latter’s Internet controls is not likely to change the Chinese position in disallowing free flow of electronic information to the Chinese people. Caught in the middle of this fracas is Internet search engine giant Google which is threatening to pull out their operations in China because of the government’s policy on censorship especially information that is considered a threat to the Communist Party’s imposed social order. U.S. State Department Secretary Hillary Clinton’s speech last week hitting the Chinese over censorship did cause some stir between Washington and Beijing. China is the United States’ biggest creditor and trade partner and President Barack Obama should know better that he has more compelling issues to be concerned with like the Healthcare Reform bill and his falling popularity than annoy the Chinese over censorship.

Warren Buffet’s take on the economy and Kraft’s takeover of Cadbury

Last night, CNBC ran an interview with Berkshire Hathaway’s chairman and CEO Warren Buffet where he expressed his views about the health of the U.S. economy and the recent deal to acquire Cadbury by Kraft, where he is its biggest shareholder. Speaking in the auditorium where he would later announce Berkshire Hathaway’s unprecedented 50-to-1 split of its Class B shares, “The Oracle of Omaha” told CNBC’s Betty Quick that he does not see a rosy picture for the American economy in the short term but quick to note that it would eventually come out better and stronger in the coming years.

Buffet is optimistic that the economy will soon rebound but it depends primarily on the ability of people to find employment. As long as people are unable to find work or find full-time employment, the mood will remain sour for the broader economy and demand for goods will stay anemic. He commended the government, especially Federal Reserve chairman Ben Bernanke, for quickly stepping in at the critical point of the financial crisis back in October and November 2008 and guaranteed that it will never be like a Herbert Hoover-like scenario during the Great Depression.

Buffet also never shied away from expressing his objection of Kraft’s £11.6 billion bid to acquire British food group Cadbury. He pointed out his difference in opinion with Kraft Foods Inc. chairwoman and CEO Irene Rosenfeld saying it was “a bad deal.” He believes Rosenfeld went on with the hostile bid despite what Buffet thinks that Kraft shares were undervalued and the cost of getting the deal done was high. Buffet’s Berkshire Hathaway owns 9.4% of Kraft.