“NO BAILOUTS required” was Minister for Finance Brian Lenihan’s message to the global financial markets yesterday, in a bid to convince all-important bond investors that they could do business with Ireland and still sleep easy.
Mr Lenihan told Bloomberg television yesterday that there were still “good elements” in the economy and that it would continue doing “real heavy lifting” on expenditure in an effort to resolve the crisis in public finances. Outside help was not on the agenda. However, uncertainty over the “bad bank” strategy continued to weigh heavily on sentiment towards Ireland in the financial markets yesterday.
The spread between Irish and German bonds – a crucial measure of the market’s assessment of the Irish economy’s creditworthiness – widened to 218 basis points at one point yesterday, up 11 basis points, while the price of insuring against default on Irish Government debt through a financial instrument known as credit-default swaps also rose in the wake of the supplementary Budget.
However, credit-default swaps on Government debt remain far below the 395 basis points peak reached in February, when murkiness about the Government’s liabilities under the banking guarantee led international investors to conclude Ireland had a 30 per cent chance of defaulting on its debt over the next five years.
Despite the post-Budget upward fluctuations, the perceived risk has substantially retreated.
Ireland’s package of severe tax hikes and spending cuts did not go unnoticed in international media.
The BBC’s economics editor Stephanie Flanders blogged that the Government had been “bullied” into its belt-tightening by the financial markets. “Why on earth are they doing that?” might be a reasonable first reaction to Ireland’s tax hikes at a time when G20 nations were endorsing stimulus measures, Ms Flanders noted.
However, for a highly open euro zone economy that could not inflate away its debt, “this kind of fiscal tightening was probably the most sensible thing they could do”, she said. “If investors conclude, on the basis of this Budget, that the Government has things under control, that yield could fall back again – and this tightening could turn out to be a stimulus.”
Elsewhere, the Financial Times’ Lex column felt the Government had got it wrong by increasing taxes rather than slashing expenditure and said the “young, well-educated, flexible workforce” cited in the Minister’s speech would make a bee-line for the exit.
“By pulling this hard on the tax lever, Mr Lenihan may cause Irish history to repeat itself. Ireland may only succeed in exporting its best hope of recovery: its talent.”
The Telegraph said the Budget would push Ireland into a debt-deflation spiral. It warned that the relative calm on the streets – apart from February’s protest – “may not last if people begin to see the current policies as self-defeating”.
A Guardian editorial was more positive (and less euro-sceptic) than the Telegraph, noting that “unlike in Britain, the Irish political class are jumping first”. It added that “no one should be crowing on this side of the water” as both Britain and Ireland are “part of the same global economic jigsaw”.
