Key hurdles to clear before investors can regain their faith in the economy
Published 26/08/2010 | 05:00
Ireland's financial headache worsened yesterday after a credit-rating cut from Standard & Poor's pushed our borrowing costs even higher.
Although earlier touted as a role model for politically unpopular spending cuts in 2009, fears over our debt outlook have resurfaced due to the rising burden of bailing out the banks -- namely Anglo Irish Bank.
While analysts debate whether the banking woes will prevent us from cutting our budget deficit to 3pc of gross domestic product (GDP) by a European Union deadline of 2014, they agree that a number of large challenges remain before investor faith in the country can be restored.
Failing to clear any one of the hurdles below would compound our problems.
We need to give investors certainty about the cost of cleaning up our banks' decade-long property binge, but a final figure is unlikely before NAMA finishes buying up assets from lenders, which it will largely have done by the end of this year.
Patrick Honohan, the Governor of the Central Bank, said the net cost to taxpayers for dealing with nationalised Anglo may be as much as €25bn, and nearly €4bn for the two building societies -- EBS and Irish Nationwide. That could push the country's headline budget deficit over 20pc of GDP this year from 14pc in 2009.
The Department of Finance is structuring the bank rescue in a way which allows it to spread the payments over 15 years, but officials expect Brussels to include much of the hit upfront in the 2010 deficit calculations under European accounting methods.
Even with actual payments split over several years, the instalment due for Anglo next year is likely to raise Ireland's gross funding requirement by €2.5bn, the National Treasury Management Agency (NTMA) said last week.
Finance Minister Brian Lenihan has said he is on track to cap the 'underlying' deficit at a target of 11.5pc of GDP this year. The official deficit target for next year is 10pc.
Officials are worried, though, that investors' perceptions could be skewed by a huge headline deficit figure. On top of the €14bn of aid that Anglo has received so far since its nationalisation in 2009, the European Commission this month approved further government support of up to €10bn.
An EU decision on Anglo's proposed plan to split itself into a good bank and bad bank would also clear up uncertainty.
Ireland's banks need to wean themselves off a state guarantee of their liabilities, and expected testing of the public debt markets by Bank of Ireland (BoI) next month will be a litmus test of the sector and the economy's long-term viability.
The banks are expected to be able to refinance €25bn of debt next month, but if they are not able to start accessing the public debt markets by year-end their funding needs will become a big issue.
ALLIED IRISH BANKS' RECAPITALISATION
While BoI has stocked up its capital base partly from private sources to satisfy tough new regulations, Allied Irish Banks still faces the prospect of majority state ownership unless it can raise the €7.4bn of capital it needs elsewhere.
Investors are looking for updates next month on a possible sale of its Polish, American and UK businesses. A failure to seal some deals would be negative for overall market sentiment.
SLOW ECONOMIC GROWTH
Ireland exited the eurozone's longest-running recession in the first quarter and the Government has built GDP growth of 4pc from 2011 to 2014 into its fiscal plans.
The International Monetary Fund (IMF) has poured cold water on our growth targets and said the country would fail to meet the EU-agreed deficit deadline. Slower-than-forecast economic growth would force us to find more savings than the €3bn promised in each of our next two budgets.
The Green Party has raised the prospect that voters may not be ready to accept all the cuts envisaged by the Government. Green Party chairman Dan Boyle suggested that 2015 or even as late as 2020 could be a more realistic deadline for cutting the deficit to 3pc of GDP.
The IMF said that, having already imposed austerity measures that culminated in €4bn of spending cuts in last December's budget for 2010, Ireland risked "consolidation fatigue" setting in among voters.
Some analysts think we are likely to see an election before the 2012 due date and many are saying the coalition Government could fall at any time.
Opinion polls suggest Fine Gael and Labour would comfortably win that election, and while both have promised to meet the EU's deficit targets, it is still not not clear how they plan to get there or if they even agree on a route.
Our traditionally peaceful industrial relations gave way to unusually large protests last year against austerity measures.
However, reaction to December's spending cuts has been limited to low-key action by public sector workers without causing major disruption to services. It is important there is no major industrial disruption, as bond investors would take fright from a prolonged confrontation.