It's good news all round when the Pink'un turns positive on Ireland
Yesterday's editorial in the influential 'Financial Times' was glowing in its praise of Ireland's economic revival, holding it up as an example to the rest of Europe. While the day of recovery may not be as far away as we feared, there's more pain on the way for ordinary citizens, says economics editor Brendan Keenan
Published 03/09/2011 | 05:00
THE 'Financial Times' is an influential newspaper. It is also a well-informed newspaper. It does not get everything right, but its views are the product of superb connections in the highest levels of financial markets and government.
So there are two reasons for taking notice when the Pink'un turns positive on Ireland. The first is that this reflects similar -- although not universal -- views in the markets. The second is that such coverage has positive effects in itself.
The paper's editorial highlights two of the reasons why opinion on Ireland's prospects has begun to shift. One is the reduced interest rate on the bailout loans -- a bigger reduction than even Enda Kenny had hoped for. As the eurozone debt crisis deepened, its leaders finally recognised that penal rates did more harm than good.
Over time, this reduction to 4pc or less will have a major impact on the public finances. The ESRI's John FitzGerald thinks it could be €10-€15bn in total. That's a big boost to the state coffers and, ultimately, this is all about the public finances.
Fears that the Irish government will have to default on its debts have faded rapidly in the past few weeks. Any 'vulture' fund which bought three-year Irish debt just two months ago is now sitting on a 30pc profit, as the default risk cost virtually disappeared.
The second reason mentioned by the FT is that Ireland will soon be in surplus in its trade and other dealings with the rest of the world, as exports grow and imports remain subdued.
This is what really distinguishes us from fellow passengers in the lifeboat Greece and Portugal. Ireland's young population also gives it the potential to grow faster than most eurozone states -- if the potential can be achieved.
A third reason for the more positive attitudes is not mentioned in the article. This is the state of the banks. The decision by US billionaire Wilbur Ross to invest in Bank of Ireland will have had a major impact. The costs of the overall bank rescue, while still enormous, are being pared back from the worst estimates.
Most analysts agree that Ireland can cope with its public finance deficits. It is the additional cost of the bank rescue that convinced many that default was inevitable. The success of this Government -- and the previous one -- in meeting budget targets, along with possible lower bank costs, means the debt may be sustainable in the end.
The burden would be enormous, but other things may change. Finance Minister Michael Noonan told the Dail committee this week that he believed collective eurozone borrowing -- so called 'eurobonds' -- would come.
German Chancellor Angela Merkel seems implacably opposed to such a thing, but Mr Noonan was reflecting the view of many eurozone leaders when he said the missing architecture of the single currency -- which in many ways is a German project -- would be retro-fitted. That would make a huge difference to Ireland's fiscal prospects.
The Finance Minister must be mightily pleased with recent developments. It strengthens his argument for an even tougher Budget in December -- to keep to agreed targets as growth falls below expectations. Failure to do so, he can say, risks reversing the improved sentiment abroad.
There is the rub for ordinary citizens. None of this means higher disposable income or more jobs in the short run. The reverse may even be the case if the day-to-day budget deficit is to be brought below €9bn next year, as planned.
The best the citizens can hope for is that, if these trends continue, the day of recovery will come sooner rather than later.