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Tuesday 23 September 2014

Bailout exit: A leap of faith

* Markets respond positively to snap announcement,br> * Angela Merkel says we are ready to go it alone
* Ireland to leave bailout programme with no safety net

Published 15/11/2013 | 02:00

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Enda Kenny has expressed concern about the end of prosecutions for murders in Northern Ireland

INTERNATIONAL investors have backed Ireland's decision to make a clean break from our punishing EU/IMF bailout programme without a safety net.

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Ireland's cost of borrowing money on world markets fell – and the stock market here rose – after Taoiseach Enda Kenny's snap announcement of the decision.

Traders said the leap of faith finally "gives clarity" to investors and was a "sign of Ireland's confidence" as we prepare to stand on our own two feet.

But experts have warned that the real test of the strategy will come early next year when the Government has to borrow funds on the international markets.

Ireland has been given assurances by its European and international partners that they will continue to offer their full support to this country.

Central Bank governor Patrick Honohan said it was the right decision to go without the backstop.

Mr Honohan – who famously announced on RTE radio that Ireland would need a bailout in November 2010 – said: "I would have done the same thing for Ireland". He called the decision a "statement of intent" but warned that "debt levels are very high".

The Taoiseach said German Chancellor Angela Merkel had pledged to work closely with Ireland to improve funding mechanisms for the economy, including access to finance for small and medium businesses.

"The German government has asked KFW, the German development bank, to work with the German and Irish authorities swiftly, in order to deliver on this initiative at the earliest possible date," he said.

This means that small Irish companies should be able to access funding at a cheaper interest rate from Germany than the rate that is being offered to them by Irish banks.

At the moment, the average interest rate being charged to an Irish small company is 4.5pc – more than twice the corresponding rate in Germany.

Mr Kenny told the Dail: "We will exit the bailout in a strong position. The Government has been preparing for a return to normal market trading.

"This is the right decision for Ireland."

German Chancellor Angela Merkel also publicly backed the Government's decision, saying: "Ireland is ready for this step. Germany is confident that the Irish Government is acting in the best interests of the Irish people and the Irish economy."

IMF managing director Christine Lagarde said the performance of Ireland boded well for the future.

"The Irish authorities have established a very strong track record of policy implementation. This bodes well as Ireland exits its EU/IMF-supported programme," she said.

"Although uncertainties remain in Europe and the global economy more broadly, Ireland is in a strong position in terms of its bond yields and has built a sizeable cash buffer.

"We look forward to continuing to work with the authorities as they address the challenges that remain."

But analysts warned that Ireland would have to test the market early next year to prove the exit strategy had worked.

"It is important to follow through; they need to get back to the markets and show they can issue bonds on a regular basis. This is not just about next year, it is about the next decade," said Padhraic Garvey, a senior bond analyst at ING Bank in the Netherlands.

However, Mr Garvey said that yesterday's decision provided "clarity" for investors.

Ryan McGrath, a bond trader at Cantor Fitzgerald in Dublin, said investor sentiment had actually been boosted by the decision.

"It is a vote of confidence by the Government in itself and that is reassuring for investors," he said.

There could even be a read across for investors to the banks, he said, because the decision suggests the Government believes that the main lenders will come through next year's stress test without needing more aid.

The decision not to seek a special overdraft facility was finalised at an emergency Cabinet meeting ahead of Finance Minister Michael Noonan flying out to a summit in Brussels.

Ireland will leave the bailout, which has been overseen by Europe and the International Monetary Fund (IMF) since 2010, on December 15.

The Department of Finance said the Government's assessment was that leaving the €67bn bailout programme without a so-called backstop of credit was the best option.

It said market and sovereign conditions were now favourable towards Ireland. The country had built up more than €20bn in cash reserves since returning to the international money markets last year.

CASH RESERVES

The department said this could be used to keep Ireland in the black until early 2015.

It also said the latest Budget, announced last month, had been designed to deliver a primary balance or small surplus.

"Domestic and international economic conditions are improving, monetary policy decisions are conducive to exit and confidence and sentiment towards Ireland have improved considerably in recent months," the department said.

Ireland's finances, Budgets and policies have been overseen by a troika of the IMF, the European Central Bank and European Commission since they agreed to the massive loan package in late 2010.

In an understated address to the Dail confirming the end of the bailout, Mr Kenny warned, however, that difficult days for the country still lay ahead.

"Neither today's decision, nor the exit from the bailout in December, means the end of difficult economic decisions. There are still demanding times ahead," he told TDs.

"It does not mean any windfall of cash. It won't mean that our economic and financial challenges are over."

Mr Kenny said the Government would publish a medium term economic strategy – a plan based on enterprise and not the speculation that led to the country's collapse five years ago.

"Never again will our country's fortunes be sacrificed to speculation, greed and short-term gain," he said.

Despite a cautious tone in the announcement, the opposition accused the Government of "bravado".

Olli Rehn, European Commissioner for Economic and Budgetary Affairs, said Ireland was well placed to make a successful and durable move from the bailout to normal funding.

Mr Rehn said Ireland was an example which showed that implementation of a comprehensive reform agenda could decisively turn around a country's economic fortunes.

"I know the Irish Government has reflected very carefully on this matter," he said.

By Donal O'Donovan and Fionnan Sheahan

Irish Independent

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