The EU and IMF bailout Ireland

The MSCI Europe ex UK index fell by 4% in euro terms during November as Ireland’s debt crisis dominated the news. Nevertheless some markets within the region performed well and, in Germany, the DAX index generated positive returns over a month in which it reached a two-year high.

Struggling under the weight of its massive budget deficit, Ireland capitulated and approached the European Union and International Monetary Fund for a financial bailout worth €85bn (£72bn), of which. €50bn will go towards government spending and €35bn will be used to support Ireland’s ailing banking sector. An average interest rate of 5.8% will be paid on the loan. Ireland then announced measures to reduce its deficit, including spending cuts, a reduction in the minimum wage and higher taxes – however, the country’s low rate of corporation tax remains unchanged.

Although there was some relief the uncertainty surrounding Ireland’s predicament had been eased, November’s events fuelled concerns about other heavily indebted economies within the eurozone. The euro weakened as investors avoided the region’s assets amid escalating fears the debt crisis will deepen and spread, derailing the eurozone’s economic recovery.

The eurozone’s economy expanded 1.9%, year on year, during the third quarter of 2010. The Organisation for Economic Cooperation & Development (OECD) now expects the grouping’s economy to expand by 1.7% in 2010 and 2011 and by 2% in 2012. Government spending cuts and tax increases in some eurozone nations are likely to hold back growth across the region as a whole and, warned the OECD, “the pace of recovery is likely to be muted”.

Prices across the eurozone rose by 1.9% during October, compared with 1.8% in September, while unemployment reached 10.1% during October, compared with 10.0% the month before. Unemployment in the region is highest in Spain, with an unemployment rate of 20.7%.

Over 2010 as a whole, the OECD expects Spain’s economy to contract by 0.2%, while Germany’s is forecast to expand by 3.5%. Greece is expected to shrink by 3.9% this year and 2.7% next year, before returning to growth in 2012. Portugal’s economy is tipped to expand by 1.5% this year and to contract by 0.2% next year. The OECD warned that Portugal must “strictly” implement its plans to cut its budget deficit.

According to recent data released by the Investment Management Association, funds within the Europe excluding UK sector experienced net outflows during October, although European Smaller Company funds proved slightly more popular.