Grim street ahead even if Ireland turns a corner

By Padraic Halpin and Lorraine Turner ,Reuters

DUBLIN — Ireland has for months been telling its European partners that it can, with their help, deliver a rare good news story to the beleaguered continent, but it can’t change the narrative without better newsflow in the rest of the eurozone. Last week, it appeared help might be on its way, when leaders at a European Union summit agreed to look at improving Ireland’s bank bailout, which the government, one of five in the 17-member eurozone that have received or asked for emergency EU cash, has been campaigning for this last year. Local politicians called the move a “game changer,” and the mood has improved further in the days since; Dublin’s tax revenues are rising faster than expected, manufacturing and service companies are outperforming their eurozone cohorts, and, following a sharp fall in borrowing costs, Ireland will sell short-term debt for the first time in almost two years on Thursday.

It still faces stiff challenges, not least tackling the worst budget deficit in Europe — 9.4 percent in 2011 — and trying to reverse one of the continent’s highest unemployment rates, but it is at least making the sort of incremental progress that may yet see it fully return to the bond market and make inroads on its 85 billion euro (US$107 billion) EU/IMF bailout. “Before the (EU summit) announcement last Friday morning, I would have been of the view that Ireland would not get back to medium-term funding in the market, and that we would need a second (bailout) program to be negotiated,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers. “However, the chances of Ireland getting back to the (bond) market have increased considerably. I think the market will need further details on what shape this deal on bank debt is going to take, but if it works out favorably, I think then Ireland could get back to the market.” An agreement in principle for EU finance ministers to look at Dublin’s financial sector with “the view of further improving the sustainability of the well-performing adjustment program” was enough to push yields on benchmark Irish 2020 bonds almost 100 basis points lower to a 20-month low of 6.26 percent. Ireland wants to soften the bailout terms principally by replacing 31 billion euros of high-interest IOUs given mainly to the failed Anglo-Irish Bank with longer-dated instruments bearing lower rates. With Ireland’s bond yields now bettering those of part-bailed-out Spain, the country’s debt management agency relaunched its treasury bill program and will dip its little toe into the funding pool with Thursday’s issue of 500 million euros of three-month money.

Ireland is merely catching up with Portugal and Greece, which have issued bills throughout their bailouts, but the debt agency said the short-term issuance marked its phased re-entry to the capital markets. How much further they can go will depend on what inroads any improvement in the terms of Ireland’s expensive bank bailout can make into a national debt pile set to peak at 120 percent of gross domestic product (GDP) next year, right on the cusp of what most in the market consider unsustainable.