Is Ireland the same as Greece?

June 1, 2011

By Kathleen Brooks. The opinions expressed are her own.

When Nouriel Roubini makes a prediction people stand up and listen. He was right about the financial crisis, now he has predicted a sovereign debt crisis (aka default) for Ireland in the next two to three years.

This prediction comes at a delicate time for Europe’s periphery. Greece is staring into the abyss of default, fiscal despair and a possible exit from the euro zone if it doesn’t receive its fifth tranche of funds from the IMF next month.

The world’s lender of last resort is taking the tough love approach with Greece and threatening to withdraw its support unless there is evidence that Athens is going some way to mend its spend-thrift ways and get a proper tax collection programme in place. Without these funds Greece wouldn’t be able to pay the wages of state employees or pay its bills, the consequences of which we can only imagine.

But could the same happen to Ireland? So far Ireland, which received the next bailout after Greece, hasn’t been put in the same bucket as Athens. Its population are considered to be fairly reliable taxpayers and although competitiveness is definitely a problem, the government is taking steps to address this problem and cut the state’s bills at the same time.

Just last week a story hit the Irish press that the minister for jobs was planning to cut the wages of 250,000 low-paid workers, which comes after rounds of pay cuts for higher earners especially those in the public sector. These are tough measures, but they are also brave measures that need to be implemented to get the country onto more sound fiscal ground.

This isn’t popular policy making, but it is realistic.

Measures such as this along with the Irish Premier’s insistence that Ireland will not default and pay back its debts are music to the ears of the EU. In Germany and Finland for example, the public wants to hear these stories to ensure their taxes are only being used to bail out states that truly want to change their ways.

While this differs distinctly from Greece, there are some similarities that may render the bailouts of both countries’ useless. Both countries are literally drowning in debt. Ireland’s gross debt is more than $2 trillion dollars, yet its economy is approx. $160bn and the annual value of its exports is just under $110bn.

Paying back this money is going to choke growth for years to come. Likewise, even conservative estimates of Greece’s debt to GDP are around about 150 percent – above the 100 percent level considered just-about “sustainable”.

The bond markets are also cautious about Ireland and remain unwilling to lend to the country without a hefty premium to counter the increasing risk of default. Two-year yields are less than half those of Greece, but remain elevated for a developed nation at more than 12 percent. Likewise, the cost to insure Irish debt against default has climbed in line with Greece, although the cost of insurance is cheaper.

Implementing budget cutting measures (as in Ireland’s case) or not (as in Greece’s case) doesn’t seem to matter when it comes to growth. At the end of last week Ireland announced that retail sales plunged in April, sales are now contracting at a 3.9 percent annual rate. Meanwhile unemployment is nearly 15 percent, industrial production is in negative territory this year and consumer sentiment has barely recovered since 2008. Greece is still mired in recession although growth expanded for the first time since the end of 2009 in the first quarter.

Two-to-three years is a long time and anything can happen. But if growth in Ireland continues to deteriorate then a default may well be necessary to make its debt load sustainable and Roubini will be right yet again. Dublin may not be staring into the abyss like Greece is, but it’s not far behind.

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