Tough times are far from over for Europe and Ireland
WHEN Ireland was negotiating its EU/IMF bailout a year ago this week, James Taplin was on the dole and struggling to make ends meet. Now the Dubliner is back in full-time employment and looking forward to treating his wife and children at Christmas.
It’s been a while.
“I moved out to Dubai in April for work. Since then I have missed my son’s fourth birthday, my daughter’s first birthday, my wedding anniversary and my wife’s birthday and everything about my daughter. The first time she stood up, the first time she spoke,” he said via telephone.
“I Skype home twice a week and after I hang up it’s a disaster. I’m all over the place upset. I know my wife is upset. My son is saying, ‘When is Daddy coming home?’”
A year after forcing Dublin into a 85 billion rescue package to prevent collapse, European are heralding Ireland as a role model.
IMF chief economist Olivier Blanchard said last month that Ireland “has turned a corner” and should be able to resume borrowing at sustainable rates in late 2012 or early 2013. “The credibility is there, Ireland is very different from the other periphery countries,” Blanchard said.
Taplin scoffs at the idea. “We are deluding ourselves with the current situation,” he said. “I don’t think we are even close to being at the bottom.”
“We are going to need another bailout. I think it’s going to be a round of bailouts until the Germans pull the plug.”
A year into its rescue package, Ireland is a much calmer place. The banks have been recapitalised to the tune of €70bn and have started to shrink their balance sheets. Deposits have stabilised after a near €150bn outflow since the summer of 2010 and rising exports mean Ireland looks set to record its first year of economic growth since 2007.
But while market sentiment towards Ireland has improved since the late summer, borrowing costs are still only 100 basis points lower than they were when Ireland applied for the bailout agreed on November 28, 2010.
Ten-year paper trading on the secondary market yields around 8.5%. That would need to fall to 5 to 6% before Dublin could tap private investors again. With panic spreading through markets, the European Financial Stability Facility rescue fund struggled to raise €3bn for Ireland this month.
With no consensus over how to deal with the crisis, Europe risks sliding back into recession. That could deny Ireland’s export-dependent economy the growth rates it needs to convince investors its debts, set to peak at 118% of GDP in 2013, are sustainable.
Dublin’s ambition to exit the bailout in 2013 and fund itself via markets would then be harder to achieve. “I would be slightly nervous of the kind of back-slapping type behaviour that has gone on in relation to Ireland at the moment,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers.
“We have done some good things, but I would still have major concerns about growth, and to get through this we will need continuous growth and quickening growth over the next number of years.”
Even without the European crisis, Ireland’s domestic problems could yet trip up its plans to be the region’s turnaround star.
Ireland’s private sector debt is equivalent to almost four times its annual economic output, one of the worst rates in the world, and with the property market in freefall for nearly four years now, mortgage arrears are accelerating.
The Government likes to point to its success in meeting its fiscal targets as a way of distinguishing itself from Greece. But a lighter fiscal adjustment was on Dublin, and it still has the worst structural deficit in the eurozone.
A report by the Lisbon Council think-tank estimates that Ireland would need fiscal adjustments of nearly 17% of GDP by 2020 to set its debt-to-GDP level on course for an EU limit of 60% in 2030.
By comparison, Greece needs a tightening of 12.7% of GDP in the same period.
Currently only half-way through an eight-year cycle of austerity, Irish people’s patience with endless rounds of cutbacks may wear out before then.
Over the summer, Ireland piggy-backed on the worsening crisis in Greece to win a reduction of about €9bn in the cost of its European loans.
This time around, it may not be so lucky.
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