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News Analysis: Outlook still cautious as Ireland announces bailout exit

English.news.cn   2013-12-15 01:31:33            

by Yvonne Kennedy

DUBLIN, Dec. 14 (Xinhua) -- The government decision for Ireland to exit the bailout program on Sunday has been welcomed by politicians, experts and citizens in the country, but many still foresee austerity and challenges in the years ahead.

Ireland was the first of the crisis-hit economies in Europe to receive the EU-IMF bailout funds three years ago, totaling 67.5 billion euros (about 93 billion U.S. dollars).

It has since been touted as a poster-child for recovery as the country implemented austerity programs that significantly reduced its budget deficits.

In an announcement about the exit, Irish Finance Minister Michael Noonan said that the country was 95 percent of the way toward the target of reducing the deficit to less than 3 percent by 2015.

"There are few major risks to exiting the bailout program at the present time," agreed Frank Barry, chair of International Business and Economic Development at Trinity College in Dublin.

To their credit, Ireland was able to gain back confidence from the international bond markets, and the country's sovereign spread has shrunk back to the pre-crisis figures of 3 percent. However, some questions remain whether the government may have miscalculated the strength of the Irish financial system at present.

"Things are picking up but still substantially underwater," said a former IBRC (Irish Bank Resolution Corporation) executive. "Have we refilled all the buckets and stabilized the banking landscape to support the country in a normal manner?"

The Irish government has also declined a precautionary credit line upon exiting the bailout program, a move that some say caters to public opinion rather than pure economic sense.

"Ireland has around 19 billion euro in funds available. This is a big enough risk-cushion for at least a year and the precautionary credit line would not have been for more than 2 years, but in my opinion there isn't any benefit for declining. The bailout loans were at 3.5 to 4 percent interest, and this credit line would incur an annual interest of 0.15 to 0.25 percent. It's cheaper money to borrow," said economist Constantin Gurdgiev.

Many speculate that the Irish government's refusal of the precautionary credit was to maintain the appearance of sovereignty, which would boost public confidence in economic growth.

"The refusal of the credit line may be an attempt to decouple from the eurozone as soon as possible. It is public relations capital. In actuality, if any conditions are set with the credit line, it wouldn't be anything not already in place under the terms of the bailout," Gurdiev agreed.

"There are a lot of potential risks, but I don't expect any of these risks to play out in short term," Gurdiev said. "Ireland is safe in terms of projections and predictions under the current conditions."

There are still significant risks however.

Ratings agencies like Moody's are not too convinced, and major bond houses are still cautious about Ireland's recovery over next couple of years, which is closely tied to the rest of the European economy, where there are uncertainties about the stability of the euro and the European financial landscape, as well as high unemployment across the continent.

Ireland cannot divorce itself from fragile European markets, though currently the outlook is positive.

"If they miscalculated how much surplus or solvency there is, and need to go back in to seek a credit line, it will be an arduous process and may not be possible if the rest of Europe is also in crisis," said the above IBRC source.

There might have been political motivations for refusing the credit line, but Gurdgiev disagrees with speculation that political motives were behind announcements of the exit from the IMF-EU bail out in preparation for Irish general elections in 2016.

"The government has no choice on timing; the credit is to the people and economy. We managed to avoid another bailout. This is a great achievement given the size of the country," he said.

Barry agreed, "The schedule for the exit was set from the start, when we entered into the bailout agreement."

Gurdgiev expressed reservations too. "When the terms of the bailout expire, the pay moderation in the public sector will expire too," he said.

"Ireland still lacks deep structural reform in the domestic sectors like energy, health insurance, and education, and there are no reforms on the horizon. Ireland needs to formulate a vision of growth drivers for its future economy that would replace the bubble driven growth that led to the crisis."

"Continued growth requires investment and consumption in the domestic economy, but capital growth is not present right now," he added.

Indeed, exiting the bailout without a credit line may be an ambitious gamble that is dependent on the continued recovery of European markets. The government is placing the bets, but if they lose the bet, the Irish public will pay the price.

Editor: yan
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