Ireland is under huge international pressure to tackle the
worst budget deficit in the EU, but a fragile domestic economy may prevent
Cowen from cutting public spending too zealously, compounding market skepticism
about Ireland’s ability to shoulder the burden of a disastrous property bubble.
The premium investors demand to hold 10-year Irish
government bonds rather than German benchmark bunds hit a fresh euro lifetime
high after the gloomy gross domestic product data, the knock-on effect of which
will be a weak tax take.
Irish five-year credit default swaps hit a record high of
500 basis points, up 40 bps on the day.
“It’s a delicate balance. I honestly don’t think there is
much alternative for the government but to impose cuts, but it certainly
suggests they need to be cautious about being too aggressive,” said Austin
Hughes, chief economist with KBC Bank.
The contraction in the first three months of the year came
despite economists’ consensus forecast for growth of 0.5 percent, reflecting
consumers’ continuing unwillingness to spend in the middle of a state austerity
drive.
It also contrasts sharply with the growth logged in most of
the rest of the euro zone in the same period, with the notable exception of
similarly debt-laden Greece.
Together with a downward revision in first-quarter figures,
the data suggests Irish economic growth will be flat this year, analysts said,
missing a government forecast for economic growth of around 1 percent.
Ireland’s open economy is heavily reliant on overseas
demand, and surveys on Thursday showed growth rates in the euro zone’s services
and manufacturing sectors slowed more than forecast this month.
With borrowing costs now at unsustainable levels over the
medium-term, Minister for Finance Brian Lenihan reiterated that Dublin was
sticking to its target of getting the public deficit to an EU target of 3
percent of GDP by 2014.
“A longer timescale for the fiscal plan would denude this
country of any credibility in world markets,” Lenihan told public radio RTE in
an interview.
The International Monetary Fund has previously said Ireland
was unlikely to meet this target and investors are concerned that as the
economy remains fragile Ireland will have to do more fiscally to get its debt
to GDP levels down.
Analysts at Credit Suisse have forecast that Ireland’s debt
to GDP level could peak above 100 percent. It was 25 percent before the crisis.
“This is probably going to mean a tougher budget,” said
Stephen Taylor, equity analyst with Dolmen Stockbrokers.
“To be honest, they should probably look to bring the budget
forward a little bit to settle bond markets.” But Lenihan has ruled out
accelerating his fiscal plans due to be unveiled on Dec. 7.
In Berlin, European Economic and Monetary Affairs
Commissioner Olli Rehn said the euro zone should learn from the work of the
temporary European Financial Stability Facility before considering setting up a
permanent rescue mechanism for countries in fiscal trouble.
Rehn ruled out a debt restructuring for Greece, Ireland or
any other country in the euro zone. He said Ireland still faced major
challenges but its government had shown determination in consolidating the
budget, adding that he was confident it would meet its fiscal targets.
Ireland’s budget deficit could hit 25 percent of GDP when
the cost of bailing out Anglo Irish Bank is included.
Irish officials have insisted the blow out is a one-off due
to Eurostat accounting rules and the fact that the cost of dealing with the
nationalized lender will be spread out over 15 years, but markets are spooked.
Anglo Irish’s five-year credit default swaps rose 25 basis
points to 955 bps, according to Markit, on Thursday on expectations
subordinated bondholders will be forced to swallow some of the costs of winding
the bank down.
Despite its fiscal woes, Dublin sold 400.1 million euros of
treasury bills on Thursday, the middle of a planned 300 million to 500 million
euros target range.
Ireland is fully funded until the middle of next year and
has recently shrunk the amount of short-term paper for sale but is continuing
with scheduled auctions to reassure investors that it can still tap debt
markets.
