Last week saw a glimmer of hope for Europe. For the first time since the crisis began, a credit-ratings agency made a positive change to its view of a troubled country. Fitch raised its outlook for Ireland from ‘negative’ to ‘stable’. And the Bank of Ireland, the country’s biggest lender, managed to raise €1bn in covered bonds – the first bond issuance by an Irish bank since late 2010.
Ireland is seen “as a model for other countries [undergoing rescue programmes]”, says Michael Hasenstab of investment firm Franklin Templeton, which is so impressed by Ireland that it has snapped up almost a tenth of Ireland’s government-bond market.
When it comes to meeting rescue programme targets, says Gillian Edgeworth of UniCredit, “every box is ticked 110%”. There have been five austerity budgets, and Ireland has made more progress in cleaning up its broken and bloated banking sector.
The key finding of the Fitch report is that Ireland is “now meeting its fiscal targets without experiencing continued GDP declines”. So, for now at least, it is avoiding the vicious circle seen elsewhere, whereby austerity shrinks the economy and worsens the debt problem.
Part of the story is that Ireland is further along in its adjustment programme than its beleaguered peers because it fell into recession first. So there has been more time for it to tackle high prices and wages, and thus become more competitive. An unusually flexible labour market has also helped.
Julian Callow of Barclays notes that Ireland’s real effective exchange rate, a key gauge of competitiveness, has fallen by 40% since 2008. Elsewhere it has barely budged. A large export sector, along with with rising competitiveness, has bolstered growth, making up for subdued domestic demand.
Fitch is pencilling in growth of 1.2% next year. In other troubled countries, growth is falling, exports are less significant in terms of GDP, and product and labour markets are far more rigid.
Still, Ireland is hardly out of the woods yet. Further problems in Spain, Italy or France would imply a bond sell-off as risk aversion rises, leading to higher implied borrowing costs for Ireland as yields jump. Ireland’s overall debt pile of 121% is weighing on the economy, says Ralph Atkins in the Financial Times.
Meanwhile, its export dependence leaves it vulnerable to the deepening eurozone downturn or a US recession triggered by the fiscal cliff. But for now, says Callow, Ireland is being seen as “the poster child” for official rescue programmes.