Euro Area

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Resilient Ireland plays cards right to ensure happy ending

The highly respected Financial Times yesterday hailed many positive economic indicators emerging in Ireland's favour, explaining how hard-earned progress to date could be a trump card in transforming our fortunes, and those of the Eurozone

Spoiler Alert, click show to read: 

By David Vines and Max Watson

Thursday August 18 2011

Markets and rating agencies, not to mention academics, often make egregious errors in judging country risk. All too often this is by failing to notice a change in macroeconomic fundamentals that really does matter. As the crisis moves through its nadir, one major error is almost certainly the market assessment of Ireland's public debt.

As a group, the troubled periphery economies have faced three challenges: achieving a leap in competitiveness that will restore growth; convincing markets that public debt is on a sustainable track; and normalising the access of banking systems to market funding. These three challenges have become inextricably linked. In Greece, deep-rooted fiscal problems have infected the financial system. In Ireland a banking debacle has swollen public debt. And without strong competitiveness to relaunch growth, this aggregate debt dynamics story can have no happy ending at all.

So the first and most important thing about Ireland is that it is swiftly restoring its competitive edge. Indeed it is moving rapidly towards a sizeable current account surplus -- in a range of 3pc to 4pc of gross domestic product. Of course, recession has also played a role in turning external accounts around, but a steady uptrend in exports has been under way for some time.

The second element is that Ireland's net public debt will probably peak at somewhere around 110pc of GDP. This is a steep challenge; but it is a magnitude that Ireland, among other advanced countries, has shown to be entirely scalable in the past. It is increasingly clear, too, that Ireland does not need to borrow from markets until 2014: that is the sort of borrower that markets can relearn to love.

The third issue is Ireland's banking saga. The Achilles heel of the economy lay in bad bank governance and supervision, and a subsequent hard landing that neither the authorities nor the International Monetary Fund saw coming. But today there is a growing recognition that this corner has been turned. Steps were finally taken at the end of March to cauterise the problem with recapitalisation based on a tough set of stress tests; and a sharp division of core from non-core assets in the two "pillar" banks that are left. The recent success in keeping Bank of Ireland in private hands is also a major psychological boost.

Fundamentally, Ireland is also displaying an admirable social resilience. It takes little knowledge of history to place this in a perspective that has already seen the economy weather four dreadful economic crises in less than a century. It matters too that emigration has yet again helped to contain unemployment to some degree -- even though, at 14pc, it is worryingly high.

As a result of all this, growth is starting to re-emerge, even though domestic demand is still contracting. As expansion accelerates, it will generate jobs only slowly. But with the speed and slope of correction in competitiveness that is under way, the feed-through to domestic demand and job creation will come. And over the next few years a socially more sustainable balance to the recovery will also end up swelling the tax base more strongly than the present pattern of export-led growth. For the pressured taxpayer, there is a glimmer at the end of the tunnel.

We are highly conscious of the contagion risks posed to Ireland by further bond market or banking shocks elsewhere in the eurozone, or by any setback in world trade. And no one can ignore the political challenge of keeping Ireland ahead of the Troika's targets. It also has to be stressed that we are assuming firm persistence in the course of fiscal consolidation. This said, we do believe that Ireland's macroeconomic fundamentals provide the most important defence there can be against all forms of shock.

Perhaps most important of all, an Irish success story of the kind we think is under way will come to be seen as a precious and crucial trump card for the eurozone debt strategy. It gives the lie to fears about a generalised transfer union. And it illustrates that adjustment in the eurozone is feasible, just as currency board countries in the Baltics have wrongfooted the diehard pessimists.

In short, when we look at Ireland against sovereign spreads in the eurozone, we see a mismatch. Either markets are persuaded that economic policies can never defeat contagion, or understandably -- given pervasive crisis fatigue -- they have dropped off to sleep at the wheel.

The writers are a professor of economics and a fellow of Wolfson College at Oxford University

- David Vines and Max Watson

Irish Independent

Taking the pain early has shown Ireland to be quicker and more courageous than most in adapting to economic adversity, writes Economics Editor Brendan Keenan

AT last, someone has noticed, even if they are foreigners. Or perhaps it is because they are foreigners.

One does not have to share all the optimism about the future of the Irish economy contained in the 'Financial Times' article by David Vines and Max Watson. Many Irish economists would quibble with the modest ceiling they put on Irish debt or their view that the corner has been fully turned in the banking crisis.

Spoiler Alert, click show to read: 

But Professor Vines and Mr Watson -- the latter helped draw up reports on the Irish banks and sits on the new Central Bank commission -- are right to say that Ireland is different from the other two rescued economies, Greece and Portugal: different, indeed, from the rest of the eurozone.

The difference is the speed with which Ireland is reducing its costs. New figures from the European statistics service yesterday show once again that Ireland has not only the lowest inflation in the 17-nation eurozone but that it is in a category all of its own.

This has been the pattern since the crash. It is calculated that the difference in inflation means that half the extra increase in Irish prices since the euro was launched in 1999 has now been eliminated.

This is exactly what markets fear Greece and Portugal -- and perhaps Spain and Italy -- cannot do. They are held back, not just by the need for austerity to reduce debt, but by not being able to compete with Germany and its satellite economies.

Ireland's remarkable deflation may well eventually restore investor confidence, but it is a short-term headache for the Government. Debt is measured against the money ('nominal') value of the economy and low inflation holds that back, making it harder to achieve deficit targets.

As the table shows, although the Irish economy grew only slightly less than that of Britain, rampant inflation gave the UK nominal growth of almost 5pc, while Ireland's was just 1pc.

The second headache for the Government is that to concentrate on competitiveness means minimising extra costs for business or consumers.

Better to cut their incomes instead, whether through lower pay or higher taxes.

Good economics maybe, but lousy politics.

Irish Independent

Please god let this be true, but I have to say we have been here before and it did not end good.





Global stocks plummet on new recession fears

Global stock markets have fallen sharply, with the Dow Jones dropping over 500 points shortly after opening amid new doubts about the world economic outlook.

Spoiler Alert, click show to read: 

Global shares have fallen sharply, with the Dow Jones dropping over 500 points shortly after opening and sharp falls also seen on European stock markets.

Dublin's ISEQ index was down 111.58 points (4.4%) to 2454.64 at the close this evening.

London's FTSE closed down 4.49%. Germany's Dax was down 5.5% to 5,628 points, while the Paris CAC dropped 5.48%.

This afternoon Morgan Stanley said its new forecasts showed the United States and the eurozone 'hovering dangerously close to recession.'

The bank cut its 2011 global growth outlook to 3.9% from 4.2%, and the 2012 forecast to 3.8% from 4.5%.

Once again, aversion to risk swept the financial markets, with corporate bonds, industrial commodities and higher-yielding currencies sliding.

Assets viewed as safe-havens - such as gold, government bonds and the dollar - have all gained. Gold rose to its second record high in a week - $1,826 - this afternoon.

The sell-off 'is rooted in the European banking system,' said Jack de Gan, chief investment officer at Harbor Advisory Corp.

'It reflects continued concern that sovereign debt issues indicate we're going to have to bail out all those banks again. And if there's stress in major European banks, it will affect US banks too.

Banking stocks in Paris were particularly hard hit, with BNP Paribas off 8.24%, Credit Agricole down 9.0% and Societe Generale lost more than 12%.

Meanwhile, this week's fresh plans to tackle the eurozone debt crisis have clearly failed to win over investors, who brushed off Tuesday's summit meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel.

Traders also dismissed the pair's proposal for a Europe-wide tax on financial transactions as 'old hat,' likely to be ineffective at best and at worst driving business out of Europe into other centres.

Asian stock markets slid earlier today, with Tokyo down 1.25% to record its lowest finish since March 15 - four days after it was hit by an earthquake and tsunami that spiralled into a nuclear disaster.

Yea I knew it was too good to be true