With Irish borrowing costs breaching record highs every day this week, Finance Minister Brian Lenihan is battling to turn the tide of market opinion and avoid the risk of a Greek-style bailout.
He said on Thursday he was frontloading next year some 40 percent of the 15 billion euros in adjustments he is targeting between now and 2014, the deadline he has promised Brussels to get the worst budget deficit in Europe back within EU limits.
“I am well aware that such measures will impact on the living standards of everybody,” Lenihan said in a statement. “But our spending and revenue must be more closely aligned. This is the only way to ensure the future economic well-being of our society.” Lenihan doubled the amount of pain he estimated was needed to get Ireland’s finances in order last week, citing higher borrowing costs and weaker growth prospects at home and abroad.
Lenihan got a vote of confidence from European Central Bank president Jean-Claude Trichet, who said Ireland’s plans to cut the deficit by 15 billion euros over the next four years should be sufficient to solve its debt crunch.
“The 15 billion ... are not in our view insufficient but of course you have to be alert permanently and stand ready to do all that is needed,” Trichet told a news conference in Frankfurt. “But I have no negative appreciation of the 15.” Ireland’s finance ministry said it expected the measures, which will be fleshed out in a four-year plan later this month, would cut the deficit to 9.25-9.5 percent of GDP next year and to 2.75-3 percent of GDP in 2014.
The shortfall is set to blow out to a jaw-dropping 32 percent of GDP this year due to the one-off inclusion of a mammoth bill for bailing out its banks. Even excluding the bank bill, the deficit will be nearly 12 percent of GDP this year.
Lenihan is hoping his fiscal measures will reassure investors and reduce Irish borrowing costs enabling the country to tap bond markets again in January.
If yields do not come down by then, the government may be forced to seek external assistance.
The premium investors demand to hold Irish bonds over benchmark German bunds stayed at a fresh peak of 543 points after the budget forecasts were unveiled.
The spread remained well below the levels of between 800 and 1,000 bps experienced by Greece just before it sought an international rescue package in May, but still suggested the market saw a significant chance Ireland would eventually have to seek a bailout or restructure its debt.
Economists in Ireland have warned Lenihan risks pushing the domestic economy into a prolonged downturn with his four years of austerity, which come on the heels of 14.5 billion euros in adjustments since the summer of 2008.
But with Brussels and international investors, who hold 85 percent of Irish debt, clamoring for action he had no choice.
The finance ministry said it was expecting economic growth of 0.25 percent this year and 1.75 percent next year, rising to 3.25 percent in 2012.
Economists in a recent Reuters poll said they expected Ireland’s economy would shrink for an unprecedented third year running in 2010 before growing 2 percent in 2011 and 3 percent in 2012 on the back of stronger exports from multi-nationals based in the country.
Lenihan will unveil more details of his four-year plan later this month and will publish his 2011 budget on Dec. 7.
The government’s task of passing December’s budget through parliament was further complicated on Thursday when it bowed to pressure and said it would hold a by-election on November 25 to fill a vacant seat that could cut its lower-house majority in parliament to just two.
