Irish Economy – Celtic Tiger Comes Up For Air!

The Irish economy and those that the hard hitting package of austerity measures and tax raises affect may still be struggling but as far as I am concerned full marks to the government for how it has handled the situation so far.

Having grown at the very rapid pace it did since the nation joined the Euro eleven years ago and the fact that its banks lent such vast amounts into the commercial and residential property markets we should perhaps not have been surprised that when it finally occurred as it inevitably would the implosion in the Irish economy would be very severe.

Clearly, carrying a budget deficit that was and remains to this day one of the highest amongst any EU member state let alone of any that chose to bind themselves into the single currency twelve years ago there can as a result of the economic failure be absolutely no room for complacency by anyone involved in attempting to turn the Irish economy around. The government well knows that sticking to a policy that boils down to one of severe public sector tightening termed by many as austerity is crucial. So far since it announced a significant number of cost cutting measures last year true to say that the government has not waivered one inch from its set task. In fact eighteen month since the real extent of the economic crisis first came to be first known in any great detail no one could really accuse the Irish government of complacency or lacking in action. In fact the opposite is surely true as the Irish government was probably the first European government to recognise the depth and extent of the economic woes and to set out harsh austerity plans that, provided it was able to sell them to the voting public and trade unions, most agreed would given sufficient time begin to fix the problem. The aim was clear – bring the deficit down to as near to 3% of GDP as possible by 2014 – this to be achieved mainly through sharp reductions in public spending combined with the raising of taxes.

There is no doubt that the Irish economic problem had been made all the worse by the weakness of its banks. Indeed, however bad the situation in Greece, in Portugal or maybe even in Spain the weak status of certain Irish banks continues to provide justified cause for concern. It will continue to so do particularly in light of the agreed set of measures aimed at ensuring banks increase capitalisation levels. Meanwhile the very high price that the Irish government needed to pay for bailing out its banks and the continued weakness of some banks reasons why markets continue to treat the Irish recovery potential with a degree of suspicion. Compared to the bail out of Britain’s banks by its government it is surely reasonable to say that proportionately the Irish rescue makes that in the UK look like a walk in the park.

Market suspicion has been tested again today as the Irish government sold EUR1.5bn of four and eight year (2014 and 2018) bonds that are currently carrying respective 4.8% and 6% yields. The bond sale event itself passed positively enough giving more than sufficient credence to a previously expressed view that provided the Irish government stuck to its guns in the face of social criticism that may yet still appear this and other future bond sale over the next couple of years should go through well.

Meanwhile it is fair to say that better recognition should be given to the Irish government and also to the Irish central bank by markets and media for the speed at which they all reacted in a combined manner by piecing together a convincing enough plan designed that will in time fix Irelands economic woes. We also need to recognise that unlike when a ‘broke’ Greece came to the markets for cash earlier this summer Ireland comes to the market with an adequate level of available reserves that would see it through into the next fiscal year.

The other part of this debate is to recognise that unlike Greece, unlike France and maybe unlike other nations that are yet to begin to implement significant measures to repair out of line budget deficits the Irish government appears to have received relatively solid support from voters for the actions that it has proposed or already taken. That is not to suggest that public or political support has been universal across the board but it is now surely enough to suggest that following the apparent rise in industrial unrest that occurred during the early part of last year that there has been sufficient recognition across the population that there was no choice to the measures put forward by the government last year.

Given that of course there remains no room for complacency and bond markets are entitled to continually test the resolve of the government. That past Irish governments failed to realise that the speed in which the economy was being driven forward by a housing and construction boom was unsustainable and that its banks were just not strong enough to take the inevitably hit when it came will no doubt be the subject of debate for years to come. Ireland wasn’t the only one taken in of course but aside Spain it was the only European economy that allowed itself to be so easily driven by construction and property related expansion. Irelands’ problems were of course made worse by the fact that through 2008/9 sterling weakened in relation to the Euro pushing up the cost of exports to the neighbouring UK to the point of making them uncompetitive. Today near 10% of the Irish population are unemployed – a worrying fact that isn’t likely to change for several years yet. Not surprisingly given that this is after all the worst economic crisis that the country has suffered in the past seventy years the government continues to push forward the message of social cohesion and partnership as being the only way that the economy can be pulled out of the mess. So far given that Irish trade unions could if they so chose make the governments life all the more difficult it seems to me that coalition, cooperation, social cohesion and partnership really are the view that holds sway amongst the Irish population – long may that continue.

Of course, given that the bond issue today has now received the reasonable take up by markets that it deserves cannot hide from the fact that for the immediate future Ireland will be forced to pay a very heavy (+4%) coupon for ongoing support. Although an additional test of resolve that it could do without given the speed at which the Irish government reacted to the economic woes and that assuming the political situation remains stable there can be no question of the government needing to go cap in hand to the IMF this is a price that will have to be paid with little complaint!