€16.5bn intervention by ECB pulls euro off floor
Cautious optimism among analysts that currency's fall will aid growth here
Published 18/05/2010 | 05:00
THE euro recovered from a four-year low against the dollar after the European Central Bank (ECB) said it would take €16.5bn from the money markets to offset the controversial purchases of government and private debt that were agreed as part of the Greek rescue.
Analysts said the euro's fall would boost the Irish economy's growth prospects -- provided that there was not another euro crisis.
The Economic and Social Research Institute (ESRI), which is forecasting growth of 2.5pc next year, may increase that estimate, senior research professor John Fitzgerald said.
He added: "Whereas before, the risk was weighted towards things being worse than expected, there is now an equal probability that they will surprise because things are better than expected."
Davy Research is the most optimistic on the Irish economy, with a forecast 4.2pc growth in output next year and national income (GNP) up 2.9pc.
"At this stage, I wouldn't totally disagree with them," said Prof Fitzgerald.
However, NCB Stockbrokers said Ireland remained vulnerable to rising interest rates and that its process of budget correction was far from over.
Ireland would find its debt ratio impossible to contain if the 'real' interest rate -- after inflation -- rose above 3pc, the NCB economists calculated.
With the present actual rate on 10-year Irish debt at 4.7pc, there is no room for fiscal slippage, according to chief economist Brian Devine.
As finance ministers met in Brussels to discuss the €750bn loan-guarantee scheme, ECB president Jean-Claude Trichet called for a "quantum leap" in how member states' budgets are controlled.
"There needs to be major improvements to prevent bad behaviour, to ensure effective implementation of the recommendations made by peers and ensure real and effective sanctions in the case of breaches," Mr Trichet said in an interview with the German magazine Der Spiegel.
The euro was trading at $1.2321 and 85.46p sterling last night, having earlier fallen as much as 1pc to $1.2235, the lowest level since April 2006.
The recovery, although modest, was credited to the ECB plan to take deposits from the banks, thereby removing cash that the bond purchases will create.
Nevertheless, market bets that the euro will continue to fall increased for a third consecutive week last week.
"The fiscal austerity measures now being effectively imposed on the southern European countries will, all other things being equal, dampen euro-area growth, suggesting that the single currency will continue to struggle on the exchanges," economists at Bank of Ireland said in their weekly analysis.
"The eurozone's recovery prospects are the main concern at this stage," said Prof Fitzgerald, "although the recovery worldwide is better than was expected some months ago."