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Which of the three little pigs will be the first to go to the markets?


WHICH of Western Europe's three bailout nations will be the first to recover? Will it be Portugal, which has a relatively small banking crisis; or Greece, which has implemented an ambitious privatisation programme; or Ireland, which has a relatively flexible workforce and booming exports?

Economists are divided and the definitive answer is still years away, but there was an interesting chart buried in one of the many IMF reports published this week that provides some answers to the question.

That chart (reproduced below) shows that Ireland is making firm efforts to restore the economy to health while the economies of Portugal and Greece are getting worse.

The Irish economy is also the only one of the three that the IMF believes will expand this year. Admittedly, the expansion will be a miserly 0.5pc and comes after a brutal three-year contraction, but it is still better than either Greece or Portugal, which are likely to see their economies shrink.

Morgan Stanley is another observer that believes the worst is over for Ireland but not Greece and Portugal. The US investment bank told clients last week to buy Irish bonds and noted, in something of a backhanded compliment, that we have a good record when it comes to digging ourselves out of economic problems.

"If there is one economy in the euro area that could meet these challenges, it is probably the Irish economy," its chief European economist Elga Bartsch said.

Ms Bartsch, who expects the economy to return to growth of 0.8pc this year and for the rate of growth to double in 2012, said Ireland was fundamentally different from the other peripheral countries because it was a deregulated, liberalised market economy.

Credit rating agency Standard & Poor's also believes Ireland will be first out of the traps when it comes to recovery. The rating agency's chief economist, David Beers, said recently that he thought "that among the peripheral countries, it would be the first to begin to recover".

The bond markets are also leaning this way. Yesterday, investors charged Ireland 8.6pc to borrow for two years, less than the 9.02pc paid by Portugal or the 16.4pc yield on two-year Greek bonds.

"The one ray of hope out there for the stressed periphery comes from Ireland," said Padhraic Garvey, head of developed- market debt at ING Groep in Amsterdam.

BlueBay Asset Management, a fund manger, said this week that it bought Irish government bonds because it was "extremely unlikely" that Ireland would need to restructure its debt.

"Ireland's economy has more competitive advantage compared with Portugal's," said London-based Mark Dowding, a senior portfolio manager at the company.

While there is no clear agreement among economists and analysts about what happens next, there is an almost unanimous view that Ireland is in a better position than Greece or Portugal to weather the storm.

The reasons for this are partly economic and partly social. While people living in Ireland are acutely aware of the shortcomings in this country, we tend to forget just how many social problems Greece and Portugal share and which do not apply here.

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Both Portugal and Greece have been military dictatorships within living memory, while Ireland is one of the world's oldest continuous functioning democracies.

While numerous tribunals have revealed alarming levels of corruption here, we are still far behind the Greek and Portuguese governments, which have also squandered billions on projects for cronies and local election promises. Tax collection is also a problem.

These social problems conspire with the economic problems to make reform even more difficult for governments in Lisbon and Athens. The public transport system in the Portuguese capital has already been wracked by weeks of strikes over austerity measures imposed before last week's request for a bailout -- leaving residents terrified about what sort of industrial action comes next when the IMF's cuts begin to bite.

The latest bailout request has since reminded many Portuguese of the hardship that followed the two previous times the country -- in the late 1970s and early 1980s -- went cap in hand to the IMF.

Despite this, some analysts say Portugal may benefit from being last in line for a bailout.

The analysts believe Europe may have learned lessons from the two previous rescue packages and see a broad consensus in policymaking circles that the rescue terms for Greece and Ireland were too onerous, straining their economies and finances.

This would leave Portugal in a good position to get somewhat softer terms in some areas.

"Investors no longer seem to be worried about a full-blown eurozone crisis and the potential demise of the common currency because they assume mechanisms are now in place to prevent the crisis from escalating out of control," said Jane Caron, chief economic strategist at US firm Dwight Asset Management.

While that would benefit Portugal initially, it will in time help Ireland and Greece as well, leaving all three countries in a marginally better position along the road to recovery.

While it is perhaps distasteful to argue too hard that this country is somehow better off that Greece and Portugal, especially when we have borrowed more per capita than anywhere else and are home to what Central Bank governor Patrick Honohan recently called one of the world's worst banking busts, it is nevertheless true that the markets believe Ireland is better positioned to recover than the others.

This was not the case a few months ago, when Greece and Ireland were lumped together while Portugal could still access the money markets.

Perhaps the clearest proof for this is the falling cost of insuring Irish government debt against default. The cost insuring against default for five years has fallen 115 basis points to 530 points over the past two weeks.

The credit default swaps cost 557 basis points for Portugal and 1,030 for Greece. Before you pop the champagne, it is worth remembering that our swaps still cost 13 times more than Germany's.

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