The FINANCIAL — Greater growth, at rates faster than the cost of financing, and credibility of economic policies: those are the conditions which must be met for debt sustainability and what Eurozone periphery countries are trying to attain.
Given the excesses of the past decade and the sometimes extreme nervousness of financial markets any factor that undermines the above conditions can have an outsized effect on the short-term metrics for the sustainability of periphery debt.
Hence, the risks emanating from the current bout of Eurozone financial jitters surrounding Greece, which have been aggravated by events in other large economies, including Italy and Spain, so that they tend to feed off of each other.
No less important is the growth outlook world-wide, beyond Europe. Yet the truth is that until just a few weeks ago, and despite the volatility and dislocations seen in financial markets throughout the summer, the risk premia for Ireland and Portugal in debt markets had come down quite significantly.
The aforementioned was due to the greater support (and less onerous terms on aid funds) promised by European authorities during the summer and the European Central Bank’s decision to restart its own asset repurchase programme, known as the Securities Markets Programme.
In the specific case of Ireland another factor may have been the private participation seen in Bank of Ireland, towards the end of July. Hence, since the 4th of August the differential between German and Irish two-year debt fell by almost 600 basis points, or six percentage points, from a starting point at around 1,350 basis points.
The above was sufficiently remarkable for the International Monetary Fund (IMF) to call attention to it at the start of this month. In the Washington based lender’s own words, “(that ‘move’ raises the) possibility that markets are starting to differentiate Ireland from other periphery countries.”
The importance of the above lies in Ireland’s access to funding markets; if it were able to regain access to them on its own it might help temper scepticism as regards the outlook for other periphery countries.
The jury on Ireland was still very much out before the latest round of turbulence but things did seem to be moving in the right direction, even if only tentatively so. There were still risks, however, and now even more so perhaps; for that reason the IMF has recommended that Europe examine whether it can do more to help the island economy.
At the same time, it is asking Irish authorities to increase proceeds from asset sales and to look at additional measures to make up for the impact which lower growth will have on its tax revenues.
More recently, just last week, outgoing ECB Chief Economist Jurgen Stark called on the government to slash public sector wages so as to rein in the public deficit, which on recent estimates will close 2011 at 10.4% of gross domestic product (GDP), a still high level, even if it is quite a bit lower than the 2009 level of 14.2%.
If Ireland’s Prime Minister meets this demand he would be backtracking on a campaign promise, which some believe could lead to union discontent. For Mr. Stark, however, it is a simple matter of Irish public servants still making more money than those in countries which are being asked to pitch in and help Ireland.
Therefore, there clearly seem to be good news in the case of Ireland, with success being realistically possible, though success is by no means guaranteed, nor will it be easily achieved. It would seem that it might behove all sides involved to try and reach a reasonable compromise.
Discussion about this post