Diligent Ireland set for a rough re-entry

After years of tough love, Ireland has made a successful return to the bond market. Now to become Europe's great example, it must manage a path to decent growth.

As Europe ponders the prospect of another decade of recovery from its crippling debt crisis, Ireland is forging ahead in its quest to make a full return to financial markets later this year. But the prospect of a sustained recovery for the country will continue to stall without proper measures for growth.

In the same week that Germany’s central bank chief, Jens Weidmann, remarked that the effects of the crisis could remain a challenge for the next decade, the International Monetary Fund warned of the risks posed to global stability if necessary reforms aren’t followed through. “Without great urgency towards international co-operation and comprehensive bank restructuring, weak balance sheets will continue to weigh on the recovery and pose ongoing risks to global stability,” the IMF said.

In its half-yearly Global Financial Stability Review, the Fund also this week warned that the global financial crisis could become chronic if improvements in financial stability and growth aren’t followed through, and that recent events in Cyprus were an “important reminder of the fragility of market confidence”.

This fragility will see the eurozone periphery remain under the microscope as onlookers judge whether or not those who have received bailouts can successfully make a sustained full return to financial markets. Having stuck to its targets for cutting the budget deficit and on track to record three straight years of – albeit mild – growth, Ireland is expected to be the first of the group to exit its bailout program, with Portugal set to follow in 2014. As the poster child for austerity, Ireland has endured years of harsh measures under the terms of its 2010 bailout. It is crucial that the country makes a sustained recovery, not only for the Irish, but also for its lenders, who desperately need a success story to come out of the whole sorry mess.

At a key European summit in Dublin earlier this month, European finance ministers agreed in principle to give Ireland and Portugal more time to repay bailout loans in a bid to help both countries return to financial markets. The extra time given – seven years – should significantly reduce the burden on Ireland and Portugal amid tough austerity drives in both countries.

But both Portugal and Ireland are finding it difficult to impose the harsh reforms needed. Portugal’s constitutional court recently ruled against a number of government-approved austerity measures, leaving the government scrambling to find spending cuts elsewhere, while in Ireland, the drive to shave €300 million from the public sector payroll was derailed this week when a majority of unions voted against the deal. The Irish government needs to find €300 million in savings from the public pay bill by July, and has indicated that it may have to consider a 7 per cent pay cut across the public sector payroll, as opposed to the failed deal that would have cut the pay of those earning above €65,000.

Despite the setback in the Irish government’s well-laid plans, the markets are still showing confidence in the country’s recovery. The government’s debt management agency, the National Treasury Management Agency, on Thursday successfully sold €500 million of 3-month treasury bills, with an annualised interest rate of 0.195 per cent. The total bids received came in at €2.4 billion, 4.8 times the amount on offer, emphasising the increasing investor sentiment for the country as it moves to exit its EU-IMF bailout program. It is the fourth such auction this year.

The increasing confidence in Ireland is due to a number of factors. The country is this year expected to have debt of just over 120 per cent of GDP, which is roughly the same as Italy’s. It has a current account surplus, exports are on the rise, and unemployment has levelled off at 14 per cent. And despite suffering through years of crippling austerity, in comparison to other bailout countries, there has been very little social unrest throughout the past few years.  The new property tax, due to come into force on July 1, provoked a bit of a reaction, but nothing on the level of protests seen in other European countries.

As in the rest of the region, the challenge for Ireland is one of growth. The EU still needs to find a way to successfully balance the need for austerity with the need for growth, something that is slowly beginning to hit home in Brussels. Without a significant shift toward the importance of growth in the region, the recovery could easily take a decade, or longer.

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