Irish economy like a patient moving off EU’s critical list

IRELAND was firmly taken off the critical list by the EU last night as the final details were agreed to the overall rescue package.

The extra latitude negotiated — an extra year to reduce the deficit to 3% of GDP, seven and a half years to repay whatever is borrowed, a competitive rate of interest and no objections to using the rainy-day Pensions Reserve Fund — added to optimism Ireland can do it.

Seen against the backdrop of Greece, which all now agree will not be able to meet its targets, and Portugal that is nowhere near Ireland in terms of being an modern economy, Ireland looked like a patient moving off the critical list.

There were no ugly scenes over the rate of interest being charged as there was with Greece when Germany was insisting that the rate must hurt. Ireland is happy enough with 5.8%.

Economics Commissioner Olli Rehn and IMF head Dominique Strauss-Kahn described the programme as a forceful response to vulnerabilities in the banking system that was imposing a heavy cost on the budget and hurting growth prospects for Ireland.

“This programme articulates a clear strategy for tackling today’s problems and for harnessing the enormous growth potential of this open and dynamic economy.

“Swift and sustained implementation of this programme will create a smaller banking sector that is robust and well capitalised, and able to serve the needs of Ireland’s economy,” they said in a joint statement.

The emphasis of the bailout package is firmly on the banking sector with Irish banking undergoing a radical transformation.

As well as selling off, shutting down and downsizing the country’s banks, new legislation will be introduced in the new year to allow major changes.

Economics Commissioner Ollie Rehn said that as well as injecting fresh capital into the banks and removing bad debts, the conditions of the bailout will see stronger regulation and supervision “to prevent a repeat of the costly mistakes of the past”.

The next series of stress tests will tell a lot. “It is essential that all member states complete the financial repair and repair their banking systems,” Mr Rehn said.

The stress tests being carried out by the IMF will tell whether further recapitalisation is needed.

Ireland’s programme on spending and revenue efforts came in for some praise, saying it spelt out how to repair the budget position “with due regard for Ireland’s system of strong social protection”.

But the devil will be in the detail as the Government’s four-year programme is unlikely to be translated word for word into the memorandum of understanding — the contract between the state and the EU which will spell out the conditions of the loans.

It could be weeks before this is completed. But in the meantime the markets are likely to stop speculating against Ireland, and the expectations are now that they will turn on Portugal.

It could mean the EU’s finance ministers spending another Sunday in Brussels to sort them out.