DUBLIN – Ireland’s three-year bailout ordeal ends this weekend, a victory in its battle against bankruptcy. But while the government is ready to finance itself without aid, the Irish can’t yet escape what has become Europe’s longest-running austerity program.
The Irish faced ruin in 2010, when the runaway cost of a bank-bailout program begun two years earlier destroyed the country’s ability to borrow at affordable rates. To the rescue came fellow European nations and the International Monetary Fund with a three-year loan package worth 67.5 billion euros ($93 billion).
The last of those funds arrived in Ireland’s state coffers this week. On Sunday, Prime Minister Enda Kenny will address the nation on live TV to salute the financial rebound that has eluded the eurozone’s other bailout recipients Greece, Portugal and Cyprus.
Unlike them, Ireland has repaired its fiscal reputation by exceeding a series of deficit-cutting targets and avoiding both labour unrest and protracted recession. That surprisingly strong performance has already allowed Ireland since mid-2012 to resume limited auctions of long-term bonds at affordable rates, an essential prerequisite to life without an EU-IMF safety net.
Ireland’s treasury also has built up more than 20 billion euros in reserves that, should disaster strike again, would permit the state to pay its bills through 2014 without any immediate need for renewed aid.
International confidence that Ireland can resume financing its debt repayments on its own means that the yields — the effective interest rates — on Irish 10-year bonds today have fallen to below 3.5 per cent from 2011 highs exceeding 15 per cent. That’s lower than Spain, which has received emergency support for its banks but avoided a full-fledged bailout, and Italy, which continues to finance one of the eurozone’s worst per-capita debts.
The most obvious evidence of renewed confidence at home is all the “sold” signs suddenly appearing in Dublin, home to nearly a third of the country’s 4.6 million residents and the epicenter of a property bubble that burst with disastrous effect in 2008. Property prices had slumped more than 50 per cent in the five years since as credit crumbled, banks drowned in toxic assets and hundreds of thousands became trapped in negative equity, but the market is finally stirring again.
Ireland still faces a mountain to climb to achieve its key goal of reducing its annual deficits back below 3 per cent of gross domestic product, the limit supposed to be observed by all 17 nations using the euro currency.
Ireland recorded a European Union record deficit of 32 per cent in 2010, the year that the bill for sustaining the country’s six domestic banks grew so large that Ireland’s own credit ratings crumbled
But since coming to power in early 2011, Kenny’s government has reformed banking regulation, negotiated with the European Union to spread out bank-debt repayments over several decades, and imposed tens of billions in annual cuts and new taxes targeting every sector of society.
As part of its reform agenda, EU and IMF chiefs ordered Ireland to impose new charges and limits on the state old-age pension system, on welfare pay for the young, and to introduce a new property tax in line with international practice. A much-debated water tax is still in the pipeline for next year.
Ireland’s major economic think-tank , the Economic and Social Research Institute, estimated in a report this week that five straight years of cuts dating to the early days of the 2008 banking crisis have pruned most workers’ take-home pay by about 12 per cent, while those best off have lost more than 15 per cent of their incomes.
Ireland’s deficits have marched steadily downward from 8.2 per cent last year to an expected 7.3 per cent this year. Finance Minister Michael Noonan says Ireland hopes to post a 4.8 per cent deficit in 2014, then 2.9 per cent in 2015. But he said Ireland would keep pruning to get its later deficits down to the eurozone’s future rule of below 0.5 per cent of GDP.
“This isn’t the end of the road,” Noonan said of the bailout exit. “This is a very significant milestone on the road, and it gives us an opportunity to pause and reflect for a very short period.
“But we must continue with the same types of policies, because the deficit is too high,” Noonan told a Dublin press conference. “It has to be brought down below 3 per cent, and then it has to be brought into balance in subsequent years. The debt is too high and we have to have strategies to make the debt even more sustainable than it is now.”
Ireland’s national debt is projected to reach 206 billion euros this year, representing 124 per cent of annual GDP. Ireland hopes to reduce that debt-to-GDP ratio, a key measure of a country’s ability to pay its bills, in 2014 by growing the size of its economy 2 per cent.
Such predictions are particularly difficult for Ireland because its growth prospects are dictated by demand from its two chief trading partners, the United States and Britain. Nearly 1,000 export-focused multinational companies based in Ireland account for around a fifth of the country’s entire GDP. Those companies increasingly are hiring again, and Ireland’s unemployment rate has declined from a two-decade high of 15.1 per cent to today’s rate of 12.5 per cent.
Noonan said Ireland must pursue around 2.5 billion euros ($3.4 billion) in cuts next year and more of the same in 2015. However, it might ease income-tax bands, particularly for single workers, who are taxed at a rate of 41 per cent on income over 32,800 ($45,000).