Ireland’s model of economic recovery


Matthew Turner
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The decision by US bond investor Franklin Templeton to increase its holdings of Irish bonds by more than a third, to at least €8.4 billion, in the third quarter raises the question of whether Ireland is on the path to recovery. A positive rating action by Fitch to put Ireland’s BBB+ sovereign rating on stable would suggest it is.

According to analysts participating in ECR’s survey, risk appetite in Ireland is slowly improving, reflective of the decision by San Francisco-based Franklin Templeton to up their stake in Ireland’s government bond market.

Ireland saw an improvement in its overall ECR score in Q3, fostering hopes that the worst of the country’s crippling economic crisis might now be behind it. Analysts upgraded Ireland’s overall risk assessment by 0.4 points, to 57.5 points, between Q2 and Q3. 


Analysts pointed to improvements across the sovereign’s economic and political risk scores, each improving by 0.1 and 0.3 respectively. In addition, Ireland’s access to capital markets (ATCM) indicator improved by 0.3 points, reflective of the country’s successful return to the bond markets in July. 

“This achievement, despite Ireland’s still-rising public debt, underlines investor confidence in Ireland’s capacity to implement adjustment policies as well as market expectations of European support for Ireland,” reports the IMF in a press release.


Ireland’s progress on its EU-IMF programme commitments has been a key factor behind its improved performance in the ECR rankings. Ireland has climbed three positions, although this was on the back of further declines for Spain and Italy – two sovereigns that have seen similar economic trends to the EU’s most westerly nation.

The IMF reported that “policy implementation remains steadfast, despite the challenging external environment, helping Ireland to start to regain market access”.

Deficit-reduction targets and debt sustainability in the balance

The extent of Ireland’s recovery will largely depend on an ability to keep its fiscal consolidation programme on track. Although Ireland recorded an extortionately high government-debt-to-GDP of 106.40% in 2012, the sentiment is that Ireland can improve its fiscal position by 2015, to reach the medium target deficit below 3% of GDP, set out in the EU-IMF bailout programme. 


Fitch ratings agency notes that Ireland’s deficit-reduction targets are on a path towards sustainability. Fitch reports: “The 2011 deficit was below 10% of GDP, some way better than the 10.6% of GDP target set as part of the EU-IMF programme.” 

Ireland’s deficit peaked to 12.6% of GDP in 2010 after a bailout of the banking sector caused the government to accept an EU-IMF programme to assist in its deficit-reduction targets. 

The 2012 deficit target of 8.6% has also been reached for this year, according to Barclays Research, which states: “The latest medium-term fiscal statement showed an unchanged fiscal consolidation path up to 2015,” with the government optimistic on reaching its 2.9% deficit-reduction targets for 2012. 

Yet Ireland’s government-debt-to-GDP has been rising steadily since the onset of the crisis back in 2008, reaching a peak of 106.4% in 2012 and remains extortionately high in comparison to the EU average – with the third-highest levels of government debt in the EU after Greece and Italy. 

According to James Nixon, euro-area Economist at Société Générale: “Irish Banks are heavily dependent on ECB financing to the tune of approximately 100% of GDP, Ireland’s fiscal sustainability will very much depend on how that financing liability to the ECB is resolved.

However, Ireland’s debt, although high, is still sustainable. Fiscal policy has been very effective and has been executed with a considerable amount of diligence. On this fiscal side, concerns are relatively relaxed: Ireland is expected to return to growth and, given the improvement in public finances, the debt levels will come down.

However, all of this is conditional on managing the finance of the banking sector, says Nixon.

Ireland’s return to growth in 2012 has temporarily bolstered its position among other indebted eurozone sovereigns. However, economic growth rates remain sluggish and any offset in growth could upset deficit-reduction targets. Real GDP is forecast to grow to only 0.5% in 2012, rising marginally to 2% in 2013, according to an IMF-World Economic Outlook report.

Constantin Gurdgiev, lecturer in economics at Trinity College, Dublin, and an ECR expert, argues that the Irish economy needs to grow at much higher rates to control the deficit.

“It is absolutely irrelevant whether the Irish economy grows in terms of GDP by 0.5% or 1.2%, since current levels of the real economic indebtedness [combining household, government and non-financial corporations’ debts] requires growth in excess of 5% GNP or 6% GDP to sustain.”

The road ahead remains challenging, but one where the wheels have begun to roll. Even though Ireland is not out of the woods, fiscal consolidation figures would seem to suggest it is embarking on the right track in restoring its fiscal creditworthiness. Time will tell whether its efforts will pay off.