The decision by EU ministers last week to revise some terms of Ireland’s bailout package offers an immediate reprise for the ailing Irish economy but raises new concerns over slipping targets and fails to eliminate the long-term possibility of default.

European Union Ministers relaxed some of the conditions in Ireland’s bailout package at a debt summit last Thursday. Dow Jones quoted Irish Prime Minister Kenney as saying that EU lenders committed to “in the order of” a 2% reduction of the current 6% interest rate on 67.5 billion euro package provided by the IMF and the European Central Bank. Ministers also reportedly promised to allow greater flexibility in how Ireland uses the loans and in terms of maturity dates. Prime Minister Kenny stated that EU lenders promised to continue to provide funds as long as Ireland meets its requirements. The EU did not force Ireland to raise its tax rate, which France previously said it would require. Irish Finance Minister Michael Noonan said the new terms will provide additional monies to Ireland if the country has not reached less than 3% of government deficit by 2015 and is not back in the markets at that time. Meanwhile, on Monday private equity investors agreed to purchase up to 1.1 billion euros of government shares in the Bank of Ireland.

Analysis

Softer EU requirements for Dublin erase immediate concerns that Ireland will need a second bailout or that it will default in the near term on IMF-EU loans. Ireland so far has met its requirements and the new provisions should make those targets easier to attain. Bank privatization is critical both as a signal to the market and in terms of economic reform since Ireland’s financial crisis started in the banking sector rather than in the government. However, Ireland will still have to undertake difficult and unpopular austerity measures and needs to tackle high unemployment rates and the failed banking system to continue to make improvements.

Concessions by the EU do not, however, eliminate the long-term possibility of an Irish default. A Greek default without serious consequences could pave the way for Ireland to follow. While Ireland is meeting its targets, the country could question why it is being forced to meet difficult bailout conditions while Greece ignored them and still received new monies. Such a reaction may become particularly attractive over time if Dublin can’t grow its economy sufficiently to sustain its debt payments and is unable to return to the markets.

For its part, the EU appears to understand that both defaults by bailout recipients and the exit of debtor nations from the monetary union are undesirable. However, slipping targets could set a precedent for continuing renegotiations and may even undercut the political will of some countries to implement austerity. If austerity programs – already causing concern among Irish unions and the general public – spark public unrest, Ireland may seek further reprieves from the EU to dampen discontent.

[Lisa M. Ruth is a former CIA analyst and officer. She is currently Managing Partner of C2 Research, a boutique research and analysis firm in West Palm Beach, Florida and is Vice President at CTC International Group, Inc., a private intelligence firm.]