Ireland: Is it time to take Ireland out of the PIIG sty? Since June, Irish 10-year bond yields have narrowed nearly three percentage points to 8.6 per cent, handing gutsy investors a price gain of 24 per cent. In the same period, yields on Portuguese debt have stayed flat at 11 per cent, while Greece’s are up eight points to 24 per cent. Italy, a possible substitute for Ireland in the peripheral pigpen, has seen its yields rise nearly a percentage point to 5.6 per cent.
Bulls would argue that Dublin, with its flexible and open economy, was always unfairly lumped together with Lisbon and Athens. Ireland’s robust performance since its November 2010 bailout is starting to prove them right. At 5.6 per cent, the primary deficit year to July was 0.7 percentage point below forecast, while the bill for recapitalising the stricken banking sector has amounted to about half the euro 35 billion allocated under the bailout, so far. A resilient export sector and productivity gains should help Ireland see modest growth this year, while Deutsche Bank forecasts growth of 1.3 per cent in 2012, ahead of Spain, Italy and France. Labour costs fell 3.5 per cent in the second quarter, compared with an average rise of 3.6 per cent in the euro zone. Debt is now expected to peak at 118 per cent of GDP in 2013, below the 125 per cent predicted at the time of the bailout in 2010.
But, it would be premature to argue that Ireland has decoupled from the periphery. The next 12 months may prove challenging. Domestic consumption is an Achilles trotter; consumers are reeling from high unemployment and a housing market in freefall. Mortgage arrears rose to 8.3 per cent in March, from 5.2 per cent a year earlier, while VAT collections were behind target. While export growth can partially offset domestic consumption, the risk is that a decline in global growth hurts those, too.
Ireland’s fate is also closely linked to other peripheral states. The only way euro zone leaders can force governments in Greece and Italy to stick to austerity is to leave the euro zone hanging in a state of semi-permanent crisis. That keeps investors nervous, and keeps bond yields up in the countries seen as weakest, including Ireland. Such friendly fire is the cost of the euro zone’s political failings.