Ireland plays the eurozone waiting game

Returning from an annual European trade show last month on a flight packed with successful Irish retailers, Ian Martin felt his country’s battered economy might finally be turning around.

A supplier of first aid and hygiene products to Irish companies, Martin has spent the last four years trimming costs, laying off some staff, and cutting the hours of other employees.

The Government has been doing the same, making inroads into an enormous budget deficit and recapitalising a near-collapsed banking system.

The policies have been painful — the Irish consume 12% less than they did in 2007 — but the country has won praise around Europe for acting hard and fast.

Unfortunately, it may not matter. The political crisis in Greece and banking woes in Spain threaten to end the modest Irish recovery spotted by Martin on last month’s flight.

“I think if there is a major crisis, people will literally stop spending money. That little bit of confidence that was coming back will be gone,” said Martin, who employs 20 people in three cities.

“It is the last thing we need, we have done as we’re told and we’re still not really coming out of it. It would really just be a further nail in the coffin.”

Martin is not the only one in Ireland watching developments in Greece and Spain with horror. The Government oversaw a return to mild economic growth last year but is quickly learning that its own policies alone will not fix the debt pile, which will peak at 120% of GDP next year.

Ireland desperately needs two things: A stronger global economy so its exporters can begin selling more and a normalisation of sovereign debt markets so the country can begin borrowing again and exit the bailout on schedule next year.

Borrowing costs have risen sharply recently as policymakers openly contemplate a Greek exit from the eurozone. Yields on Ireland’s benchmark 2020 bond jumped by more than 60 basis points over two days in mid-May to hit a four-month high of 7.62%.

More worryingly, short-term borrowing costs showed signs recently that they could soon exceed those on longer-term bonds, a sign investors are starting to price in the likelihood that Ireland will need further aid when its €67.5bn of EU/IMF loans run out.

It is an abrupt end to a bond market run where yields more than halved over the course of nine months.

That had been the reward for meeting every bailout target set, securing a cut in the cost of official funding, and drawing private investment into the only bank not run by the Government.

Mindful that yields on 10-year money stood above 14% at another moment of panic for the eurozone last July, the Government is urging patience. For now.

“When we came into government, we were downgraded by all of the ratings agencies over a period of six months, even when we felt we were getting a handle on things. It took quite a while for that to filter out and be recognised,” European Affairs Minister Lucinda Creighton told Reuters.

“I think there’s a likelihood that the same thing will happen in Spain and I think that the government has to be given breathing space to implement reforms and conduct the independent stress testing of its banks.”

Ireland’s banks have no direct exposure to Greece and exporters ship less than 0.5% of all goods there. Michael Noonan, the finance minister, quipped earlier this month that the direct impact of a Greek exit from the euro could be limited to the availability of feta cheese on supermarket shelves.

But Ms Creighton says a Greek exit would be “very, very, very dire”.

Investors would likely cast around to consider what other countries could be forced to quit the currency and Ireland’s risk premium would probably rocket.

Deposit holders who stayed put when Irish banks lost more than €100bn of funding in late 2010 may think again and foreign companies considering following firms such as Pfizer and Google to set up in Ireland’s business-friendly, low corporate tax economy, might reconsider any move.

Investment from such multinationals, whose employees account for almost 10% of Ireland’s workforce, is a key plank of business plans for the country, helping to take the sting out of austerity measures by creating jobs — 13,000 in the next year, the Government hopes — and keeping export activity buoyant.

The most immediate threat is tomorrow’s referendum on changes to Europe’s fiscal treaty. A no vote, like a Greek exit, would see big firms rethink investments, the head of the agency tasked with attracting them said recently.

The chairman of Ireland’s American Chamber of Commerce, Peter O’Neill, agrees.

“If we end up in that scenario, that’s going to drive uncertainty and what that’s going to mean is companies who are making investment decisions are maybe going to pause and ask, ‘Am I making the right decision’?” said O’Neill, who employs more than 3,000 workers as head of IBM’s Irish operations.

What matters most, though, is economic growth. When you export more than 100% of your total production, instability abroad hurts.

The slowdown in Ireland’s trading partners, which dragged the country back into recession in the last quarter of 2011, forced the Government to revise down forecasts at every turn over the past 12 months. Now GDP is set to grow 0.7% again this year.

That is still better than most eurozone countries and Ireland also has the distinction of being the only country in the eurozone showing growth in the amount of goods and services companies are purchasing.

But relative performance can only get you so far.

Exports to the eurozone were flat in the first quarter of 2012, figures that will likely worsen if there is prolonged turmoil in Greece or Spain.

— Reuters


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