Ireland's hard slog pays dividends

Dublin's re-entry into financial markets is the pay-off for two years of hard labour, and provides a hopeful signpost on the long road of austerity.

In a move that is likely to increase investor confidence in Ireland, the state has made a successful, albeit limited return to financial markets. The step forward allows for a glimmer of optimism as the country struggles to drag itself out of a crippling recession that has brought it to its knees.

The auction was the state’s first in almost two years and serves to highlight the depths of the crisis that Ireland has endured. It is a very small victory for the country, due to the low risk involved in the Treasury bills, and Dublin still has a long road ahead.

Ireland’s limited return to the market raised €500 million through the issuance of 3-month Treasury bills to private investors at a yield of 1.8 per cent. In contrast, Spain last sold 3-month Treasury bills at the end of June at a yield of 2.362 per cent. Even better news for Ireland was the demand for the securities. The state received €1.4 billion in bids, the vast majority from international investors.

To put it into context, both Greece and Portugal have issued Treasury bills throughout their respective crises and bailouts. Ireland in contrast last held a Treasury bill auction in September 2010, just weeks before it went cap in hand to Brussels begging for a bailout.

The auction was seen as a first run to gauge investor appetite for a full-scale return to the markets. In the run up to the event, there was much speculation on investor demand and the interest rate that the state’s National Treasury Management Agency would offer. While the state had been considering returning to financial markets for a few months, the recent EU summit was the final push the government needed to spur it into action.

Immediately following the summit there was a sharp improvement in Irish bond yields, with the yield on nine-year bonds falling from 7.12 per cent to 6.47 per cent. On Thursday, the yield on the state’s 2020 bond was at a steady 6.10 per cent. This improvement is a major feat for Ireland. Just a year ago, yields on its 10-year bonds were at an all time high of 14 per cent.

With the auction hailed a success, Ireland can now look to the next step in its phased re-entry to the markets. Adding to the positive sentiment are the latest figures from the state that show Ireland is on track to meet the fiscal targets set out in its last budget.

The country’s budget deficit fell from €10.8 billion in the 6 months to June 2011, to €9.4 billion in the six months to June 2012. And it’s on track to meet its target budget deficit of 8.6 per cent of GDP for 2012. This would be a marked improvement on last year’s deficit, which at 9.4 per cent of GDP, was the highest in the EU. These latest figures demonstrate the state’s commitment to pull itself back from the brink.

But it wasn’t all good news for Ireland this week. A day before the Treasury bill auction, it was revealed that unemployment in Ireland has spiked to an 18 year high of 14.9 per cent. This is despite the mass emigration that has occurred in the country since the crisis began. An estimated 76,000 people emigrated from Ireland last year, leaving behind an ageing population to cope with the country’s massive debt. The recipient countries were principally the UK, Australia and Canada, with latest figures from the Organisation for Economic Development showing that the number of Irish people leaving for Australia has doubled since 2008.

In addition to this, an IMF paper released in the past week illustrated the depth of the crisis. In the report, researchers Luc Laeven and Fabian Valencia studied 147 banking crises from 1970 to present day and found that the Irish banking crisis is the worst ongoing crisis the world has seen since the Great Depression of the 1930s

In the study, Laeven and Valencia graphed the costliest crises through three dimensions; fiscal cost, increase in public debt, and loss of output.

Ireland ranked in the top 10 for all three categories. The fiscal cost of the banking crisis was 41 per cent of GDP, the increase in public debt rose by more than 73 per cent within four years, and finally, output losses have jumped to 106 per cent of GDP since the crisis began.

In a chilling assessment, Laeven and Valencia remark that "Ireland holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top-ten of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression.

"And the crisis in Ireland is still ongoing.”

But Ireland’s hard work to bring itself back from oblivion looks to finally be paying dividends. The country has embarked on a drastic program of spending cuts and tax hikes that have pushed its economy to the edge. The limited return to financial markets is a clear sign of its progress in the past two years and paves the way for a return to bond markets in the next 12 to 18 months. As well as this, the EU has at last committed to reviewing the terms of the Irish bailout.

At the most recent EU summit, leaders specifically singled Ireland out, pledging to "examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment program".

With this not-too-subtle nod of approval from Brussels, Ireland has reaffirmed its status as the poster child of austerity. Unfortunately, a major stumbling block for the state is that its future success depends not only on itself, but on the broader global economy. Ireland’s only chance at sustained recovery is for growth in the global economy.

With central banks around the world embarking on a range of stimulus measures last Thursday, it’s clear that the global economy is entering into a potentially very dangerous phase. As a heavily export-led country, Ireland will only fully recover once the global economy improves. For now, the state will have to dig in its heels and continue on its austerity path as the EU’s pet favourite.

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