Europe will not take assurances at face value
Brian Lenihan’s assertion after the last budget that we had turned a corner has not been taken at face value by the European Commission. It is a concern that the projected economic growth figures could prove too optimistic and that further cuts in spending will be needed to ensure we get back to a 3% GDP deficit by 2014.
Irrespective of whether Lenihan was right we can take comfort from the positive reaction from the markets that this country takes its international obligations seriously. That was reflected in the latest bond issue when the Government borrowed €1bn on Tuesday through the NTMA.
This was achieved at the lowest interest rates since the financial crisis was at its peak in 2008.
The improving sentiment towards Ireland was reflected in the yield (interest rate) of 4.426% on bonds repayable in 2020. By comparison the acutely struggling Greek economy was charged over 6% for its latest round of borrowing as markets expect it will have to be bailed out by the EU or the IMF.
Another important point to emerge was that the NTMA had offers totalling €5bn on the day, which allowed it to borrow €1.5bn in total, instead of the more usual €1bn. In reality international institutions were queuing up to offload as much as €5bn in fresh loans to us on the day.
NTMA boss John Corrigan said Ireland had to be prepared to “walk the walk” as well as “talk the talk” to impress bond markets.
It was important to send a clear message “about how you are going to correct the problem and then deliver” to keep the markets on side.
He also took the positive view that the gap between what Germany pays to borrow abroad and the amount that we are charged by intentional lenders could fall to less than 1% before the year is over.
That suggests Corrigan believes the markets are confident about the resolve of the state to get its finances back in line with EU parameters even if the EU commission has some reservations about us.
He stresses the need for continuous action in the years ahead to bring the budget deficit back to 3% of GDP.
He agreed this was easier said than done in a way that may have anticipated what the Commission was implying in its pointed comments on Thursday.
Pulling no punches the European Commission demanded the Government’s strategy to reduce the budget deficit to within EU limits by 2014 be backed up by more concrete measures.
It accused the Government of not being specific enough on it plans to cut the deficit after this year.
It also warned of the danger that the economy might not grow as quickly as anticipated in the crucial period of correction ahead.
It described the average growth of 4% from 2011 to 2014 projected by the Government as “favourable” — in other words it regards those forecasts as suspect.
Ireland has until 2014 to bring the deficit back to the 3% of economic limit set out in the EU’s stability and growth pact.
So while the Commission recognises we are moving in the right direction it is making it clear that if the growth projections are wrong the Government will shave to slash spending further to make up for the inevitable tax shortfall resulting from the lower than projected growth figures.
With Greece struggling and increasing concern among German politicians that some of the weaker economies in the EU are not measuring up, it is clear we have to keep the Commission reassured that our cost-cutting regime will deliver, otherwise we could suffer a backlash from the markets and the cost of borrowing could rise.
