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Credible stress test inspires confidence

SHARE prices rose on the Dublin market yesterday. Abroad, famous institutions whose experts had spent the weekend analysing the state of the Irish economy sent out a new message. One headline summed up the advice of one of the most iconic, Morgan Stanley: "Investors 'should buy' Irish sovereign risk."

What had happened to force a chink of light into the clouds that hang over our economy and dampen down the speculation, at home and abroad, that we would be forced to default on our debts?

The answer is simple. The stress tests on our banks, reported last week, were credible.

Unlike their predecessors, they did not make easy but doubtful assumptions. The figure they gave for our liabilities was painful, but we have good reason to hope that it is a final figure. Knowing it makes it possible, if no more, to bear the pain.

But nothing in the world experts' reports, and nothing in the latest Exchequer returns published yesterday, will induce people to dance in the streets.

Morgan Stanley advises investors to buy long-term Irish Government bonds with a yield of 9.4pc. No matter how grave the plight of the banks and the public finances, that is a bargain.

This summary forecasts that our debt-GDP ratio will peak at 120pc in 2013. It also predicts some growth in the economy this year and again next year. On this point, it may err on the optimistic side.

On property prices, no optimism is on offer. Morgan Stanley expects average Irish home prices to fall to the level of 1998, making the ratio of home prices to average income the lowest for 16 years.

There is no wishing away the depressive effect of such a prospect. Nor can we take any comfort from the information on taxes and unemployment in the Exchequer returns. VAT and income tax yields are slightly below their targets; no wonder, when spending power has fallen along with incomes. Unemployment at 14.7pc is not only above forecasts but deeply embedded.

Nevertheless, the basic message remains this: that we can survive, that we can recover, that we need not be driven into the chaos of default. It will require hard work, fortitude and realism, and skill and wisdom on the part of the Government. We will have to swallow more bitter medicine before we emerge from our toils, but at least the watching world, this once, likes what it sees.

Irish Independent