Friday 24 May 2019

Portugal's crisis shows that our problems haven't gone away

One lesson to learn from Portugal is how little room for manouevre there actually is for the bailout countries

Brendan Keenan

Brendan Keenan

IN THE fairytale, there is only one little piggy left standing, because its house is made of brick.

Last week, as Portugal teetered, it began to look as if Ireland would be the only bailout PIG (Portugal, Ireland, Greece) to avoid the collapse of its programme and the nasty consequences which are assumed to follow.

But is the Irish house really made of such solid stuff? There are grave doubts at home; often backed by substantial data about the positive, but illusory, effects of US multi-nationals on growth and UK tax-avoidance schemes on the national balance sheet.

But outsiders seem unfazed. The interest rate charged on Irish government debt in the bond market hardly budged as the Portuguese equivalents of, first Michael Noonan, and then Eamon Gilmore, resigned from the government.

The parallels even extend to the fact that foreign minister Paulo Portas is also leader of the junior party in the Lisbon coalition. Eerie, or what? And, of course, the row is the same as the one which simmers endlessly here – whether to press on with "austerity" or, somehow, find room to create some jobs from investment and/or leave more money in consumers' pockets.

Yet there was no "contagion". Even in neighbouring, troubled Spain, the rise in the interest rates on government debt still left them, when measured against German ones, at little more than half the level seen last summer.

It was quite different with Portugal itself. Bond yields shot up to crisis levels. It is hard to find a rational explanation for this, although market analysts did their best. Logically, it means lenders think there could be a Portuguese political and fiscal crisis, but it wouldn't affect anyone else in the euro area.

Perhaps they have concluded from three acts of the Greek tragedy (Act Four is under way currently) and two in Cyprus, that the eurozone authorities will somehow deal with each crisis separately while, in the words of ECB president Mario Draghi, doing "whatever is necessary" to preserve the currency.

Or, just as likely, the reaction says more about the current nature of the bond market (especially in high summer) and too much should not be read into it. Figures last week showed banks as the sole net buyers of Irish government bonds over the past 12 months, and they have nowhere else to go.

Which is not to say that the Portuguese affair is of no importance, or that we can draw no lessons from it. One lesson is how little room for manoeuvre the governments of bailout countries have. Any serious political fracture condemns them to a second bailout – after the Troika has set terms for writing the cheques.

Irish ministers know all that, which is why the occasional talk of resignations is merely that. It will require quite a successful sojourn back in the markets before any major figure can think of a leadership challenge, or even a seat-saving resignation, without bringing the house down. Either that, or wait until they are in opposition, which might come sooner.

A second conclusion is that, while the Irish edifice may not be solid brick, it is of durable construction. Not a lot of people seem to know this, but the Irish austerity programme was less severe than that imposed on Greece and Portugal. In addition, it appears to have had quite a cushion built in.

Last week saw the Exchequer figures for the first six months. They revealed tax revenue broadly on target, despite other data showing the economy slipping back into recession; rather than heading for the 3 per cent annual growth forecast in the December Budget.

One prefers the hard cash of the tax revenues to the increasingly dubious estimates for output (GDP). Perhaps the economy is not doing quite as badly as those estimates say. Even so, it is hard to escape the conclusion that, had the economy performed as predicted, Ireland would have achieved its targets two years early. Either that, or had two much easier final years.

There is still a bit of that torn cushion to lie on, thanks to the deal on the Anglo promissory notes. The Troika, the Department of Finance and the Fiscal Advisory Council would all like to see it used to get ahead of the 2015 targets.

The politicians would like to make the next two Budgets easier, and are squaring up only about how to do it – taxes or cuts.

But no one is going to war over it. Austerity fatigue is a recognised phenomenon. After a bit of patching, the Portuguese will get easier terms, though getting back into the markets is another matter.

In Ireland's case, one would like to have the finances in better shape, to guard against the all too likely prospect of a new euro crisis. But there is a lot to be said for trying to improve the mood music, even though – or perhaps because – the economic realities remain bleak.

Irish Independent

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