Ireland Should Drop Model-Student Act and Get Help

Talk to practically any investors in London and they will tell you Ireland is a shining example of a successful euro-area bailout program, a narrative that the country’s international creditors eagerly endorse.

So it might have come as a surprise when Finance Minister Michael Noonan said at a meeting with his euro-area counterparts this week that the Irish — and Portuguese — may get an extension on the maturities of some of their bailout loans.

This would help to reduce Ireland’s debt burden, of course. But why is it necessary if Ireland’s bailout has been such a success? The answer is simple: Ireland’s debt is not yet on a sustainable path, and the country needs more help to return to one if it’s to become the success story that many say it already is. Read more of this post

Ireland Should Vote Yes on the Fiscal Compact

With fewer than ten days to go until the Irish referendum on the fiscal compact, a huge percent of the population remains undecided about how they are going to vote. According to a recent opinion poll, 37% of respondents will vote in favour of the fiscal compact, 24% against it and 35% are undecided. While the fiscal compact is misguided and poorly conceived, it is overwhelmingly in Ireland’s best interests to vote for it anyhow. Read more of this post

What happens to Ireland if Greece defaults

This piece first appeared in the Guardian on September 21st and has been reposted here with the Guardian’s permission.

Greece is hanging by a thread and Ireland is getting increasingly nervous about the implications for its own future.

The whole point of austerity measures in Greece was to reduce the primary deficit. With retrenchment choking off any hope of economic growth, the opposite has occurred.

There is now a real chance that Greece will be denied the €8bn tranche of the previously agreed €110bn bailout programme, in which case default would be inevitable and it would most likely abandon the euro.

If this happens, what are the implications for Ireland?

Both the troika and Ireland have a part to play in determining whether the country follows suit or not. However, as long as EU leaders remain committed to the euro project, Ireland should stay the course and continue to implement the terms of the bailout programme.

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4 reasons the recent EU summit agreement will fail

I was planted firmly on a beach chair on holiday during the EU summit on July 21st and was worried I might be missing a piece of European history-in-the-making. As it turns out, I didn’t miss much at all. Upon my return a few days later, analysts were just as confused about the outcome of the EU summit as they had been immediately following its conclusion. Digging into the details of what was agreed at the EU summit, there are four main problems that will preclude the agreement from drawing a line under this crisis.

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Forget renegotiating the bailout: Ireland should focus on domestic reforms

The euro crisis has hit a new level of panic this week with contagion spreading to Spain and Italy, much bigger countries than Ireland that threaten to pull the euro area apart at the seams. EU leaders will hold an emergency meeting this Thursday in an attempt to come to an agreement on how to keep the euro area together.

As a small fish, the Irish government has very little control over events in the upcoming week at the EU level. It therefore has two choices: it can either wait in anticipation to see if the eurozone will be saved or break apart, or it can get to work immediately on some necessary reforms at home.

There are no painless, popular options for the Irish government in the short-term. But if the government can swallow some of the pain in the next year to implement difficult reforms, the Irish economy will be in a much better position to reap substantial benefits further down the road.

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The euro is dying a slow death

The euro is dying a slow death. Political leaders are unlikely to take the steps necessary to address the underlying factors creating the current euro crisis, and the eurozone will eventually break up as a result.

To highlight the severity of the euro crisis, one only needs to glance at credit default swap (CDS) spreads for the peripheral euro area countries. CDS is a form of insurance against default or restructuring. The higher the CDS spread, the more likely investors think a sovereign default is.

In the first week of June, five-year CDS spreads for Greece were a whopping 1495 basis points, for Portugal 708, for Ireland 650 and for Spain 255. This compares with only around 200 for Iceland, a country that underwent a private default only two and a half years ago.

The euro crisis is just as much underpinned by politics as it is by unbalanced economies, rigid labour and product markets, burst property bubbles and unsustainable public and private debt levels. This has been particularly evident in recent weeks, as a cacophony of voices has emerged at the EU level on how to handle Greece.

Ultimately, it is politics, more than unsustainable debt, that will threaten the very existence of the euro.

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What happens to Portugal and Ireland if Greece reprofiles/restructures?

There is currently a debate raging about how exactly private investors will be involved in a Greek debt reprofiling in order to secure a second bail-out for the government. I wrote in a blog post last week that I think Greek debt will probably be rolled over as demanded by the European Central Bank (ECB). If Greece reprofiles or restructures its debt, would the same be inevitable in the other two insolvent euro area countries, Portugal and Ireland?

I do not think a Greek debt reprofiling or restructuring would necessarily lead to one in Portugal and Ireland, though it might if either country were to opt for a strategic default.

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Will Ireland need a second bailout?

Irish minister for transport Leo Varadkar caused a commotion in Ireland over the weekend by saying that Ireland will need an additional bailout to service its debt burden through 2013. Is he right? It looks like it to me. The gap between Ireland’s financing needs over the next two years and the funding it will have available has narrowed, but given that Ireland is expected to remain frozen out of the markets until mid-2013, this gap still looks impossible to bridge.

In the Economic Adjustment Programme for Ireland published in February 2011, the European Commission (EC) indicated that it expected Ireland to return to the markets in 2012 to raise significant amounts funding. In its Spring 2011 update published in May, however, this assumption was changed. The main difference seems to be the amount of the EU/IMF bailout package earmarked for the banking sector. In the February report, this was assumed to total €35bn. By May, in the wake of the stress tests, this had been reduced to €19bn (the stress test results mandated that €24bn be used to recapitalise the banking sector, but the Irish government has recently announced that around €5bn of this will come from private investment and liability management exercises (LMEs)). Consequently, around €16bn that was previously dedicated to bank recapitalisation has been freed up for government funding.

As a result of this, the EC’s assumptions for market financing have changed dramatically. In February, the EC expected the government to raise nearly €40bn in the markets in 2010-13. By May, this figure had been more than halved to around €19bn. Still, according to the European Commission, Ireland will need to raise €14bn in the markets in 2013. It is extremely unlikely that Ireland will have regained the confidence of investors by 2013 to achieve this, particularly given that discussions about debt restructurings and reprofilings in Greece, Portugal and Ireland will be at fever pitch in the run up to the implementation of the European Stability Mechanism (ESM) in mid-2013.

Furthermore, the European Commission’s calculations are based on overly optimistic assumptions. According to the May report, the EC expects Ireland’s GDP to grow by 0.6% in 2011, 1.9% in 2012 and 2.4% in 2013. I expect Ireland’s economy to contract by around 1% in 2011 before returning to more moderate growth of around 0.5% in 2012 and 1.5% in 2013. Consequently, I expect Ireland’s funding requirements in 2011-13 to be slightly larger than those laid out in the May report.

If Ireland cannot meet its debt servicing requirements through the end of its bailout programme, will it be forced to default? This is extremely unlikely. Instead I expect that Ireland will continue to meet the targets established by the EC, the ECB and the IMF (the so-called troika) and that the troika will expand Ireland’s access to EU and IMF funding until 2013. In mid-2013 when the ESM is implemented, I expect Ireland will be forced to restructure its debt in an orderly, managed fashion in cooperation with the troika and the banks.

Leaving the euro–an option for Ireland?

As the Economist Intelligence Unit’s Ireland analyst, I wrote an op-ed piece in today’s Financial Times headlined Ireland should leave the euro. This headline was added to my article by an FT editor, and is slightly misleading. The piece was not prescriptive, and in fact I do not think Ireland should definitely leave the euro.

I do however think the case for Ireland is less clear-cut than it is for all other euro area countries and particularly for the other peripheral countries. If Greece or Portugal were to leave monetary union, there is little doubt that it would have disastrous results for both countries. Ireland’s economy is structured differently, however. Ireland has already implemented many of the structural reforms Greece and Portugal are just beginning to think about, and its growth prospects are consequently much better. Furthermore, many of the downsides to leaving the euro are going to happen in Ireland anyhow.

Of course, leaving the euro area would not be easy or painless. But I think it should be on the table in Ireland and debated very seriously amongst the political elite and the public more generally. The point of my article was to moot the idea and kick off the debate. Judging from the commentary it received when it was picked up by the Irish Economy blog here, the piece succeeded in doing just that.


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