Ireland: return to health or brief respite?

Ireland made a triumphant return to the international debt markets this week after exiting its three-year European rescue programme.

In a heavily over-subscribed offering, Dublin sold €3.75bn of ten-year bonds priced to yield 3.5%, raising almost half the funding it needs this year. The yield on existing ten-year Irish paper fell to an eight-year low of 3.5% – down from 14.6% two years ago – as prices rose.

What the commentators said

“There is a general idea in the market that the European crisis is almost over,” said Piet Lammens of KBC. So it’s no wonder investors trust Ireland to shake off its banking crisis and recover without further help. But can it do that?

It does appear to be on the road to recovery, with unemployment having fallen to 12% from a peak of 15%, an uptick in consumer confidence and house prices, and the relatively strong rebounds in Britain and the US, Ireland’s top trading partners, boding well for the crucial export sector.

There is a chance, however, that Ireland’s bail-out exit could prove to be “a brief respite”, as the FT’s Peter Spiegel put it. GDP growth is broadly flat, so it will be some time before the country starts working off its huge debt pile of 124% of GDP, especially since the government keeps borrowing. The annual deficit is set to reach 7.4% of GDP.

High private debt is hampering the domestic economy, with the banks, whose bankruptcy plunged Ireland into this mess in the first place, still causing concern.

With a quarter of home loans 90 days in arrears, and many businesses weighed down by toxic real-estate debt, yet more holes could appear in the banks’ balance sheets when rigorous stress tests take place this year.

Rattled investors could then send long-term interest rates sharply higher by selling off Irish debt, undermining growth. The EU, concluded Spiegel, could once again be “touting Ireland as a success story prematurely”.

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