With Ireland at the helm of the six-month rotating presidency of the European Union, leaders and policymakers have praised the country for regaining international confidence after seeking a bailout in 2010. But Dublin cannot concede victory just yet.
Prime Minister Enda Kenny told journalists last week that the country was regaining the trust of financial markets, after having sustained a string of austerity budgets and battling with high unemployment.
A week ago, Dublin successfully launched a five-year government bond auction for €2.5 billion with an interest rate of 3.3%. It was the first debt offering since Ireland was given a €85 billion package in 2010 to rescue its banks after the country’s property bubble burst.
Several waves of austerity measures since 2010 have crunched spending in healthcare, education, pensions and social welfare. Meanwhile, multinational firms attracted by Ireland’s low corporate tax (12.5%) have returned to invest in the country, pushing growth up by 0.5% last year.
“We are trading our way to recovery,” said Irish Deputy Prime Minister Eamon Gilmore, adding that an export-led recovery was the only sustainable way out of the crisis. The improvements in competitiveness, however, have been ineffective in creating enough jobs to reduce the very high unemployment rate, which holds steady at 14.6%.
“Economic recovery is essential if debt burdens are to be sustainable, if employment is to grow and if the decline in living standards is to be arrested. While recovery in 2013 is possible, there is no hard evidence that recovery is under way,” said Irish economist Colm McCarthy, adding that there is no broad-based recovery in the volume of exports.
So, even if growth prospects for 2013 and 2014 are good, forecast at 1.1 and 2.2% respectively, much of the budget deficit – 8% of GDP – and public debt – about 120% of GDP – are structural and will not be eliminated with economic recovery.
Kenny is confident that his country can emerge from its EU-IMF bailout programme before the end of the year and hopes an agreement can be found on allowing the eurozone bailout fund to recapitalise banks directly, rather than use taxpayers money and increase countries’ debt.
“I am confident that we will secure a deal before the end of March, which is the payment date for the next €3 billion,” Kenny said.
The exit deal is indeed pending on the €3.1 billion interest repayment of the €31 billion promissory note loan, issued to save the Anglo-Irish Bank.
Dublin hopes that it can renegotiate some of its debt used to recapitalise its banks by allowing the European Stability Mechanism to take over some of its equity and break the link between sovereign and bank debt, which was agreed last June by EU leaders.
What happens without a bank debt deal?
But there are genuine fears within Irish government circles that no major progress will be achieved on bank debt before the German elections in September, which will make difficult to exit the bailout programme.
Ireland has fulfilled its part of the bargain as it sought the bailout to avoid contagion and would look for support committed to it from abroad, Kenny added.
That might put Irish banks in the position to need another bailout. Ireland’s creditors, the European Commission and the IMF, have indicated that the possibility that Irish banks may need further capital injections cannot be ruled out.
“Ireland’s recently regained access to market funding still faces some vulnerabilities,” said IMF and EU sources, singling out a further weakening in trading partners’ activity and a delay in the revival of banks’ lending capacity, needed to support the recovery.
Ireland, like other indebted countries, also depends on a sanguine bond market for sovereign lending.
“It is just six months since the eurozone almost came off the rails in a bond-market panic focused on Spain and Italy, and there are plenty of banana skins down the road which could spark a re-run,” McCarthy argued.
There is therefore no certainty that Ireland can emerge successfully from the programme, or that any country that does emerge might not need official lender support again at some stage in the future, the economist said.