“Ireland is different [from other eurozone troubled countries] in long-term fundamentals” (Marc Coleman)

The Dublin Irish Overall stock market index just crashed today almost six percent, a historical low since July 2009. The probability of default of Ireland in a 5 year time horizon went up today as the yields for 10 years. Ireland is part of the TOP 10 world default ranking of countries in the monitor of CMA DataVision, occupying the 8th position, with Greece (in the second position) and Portugal (in the 10th position).

Later today Standard & Poor’s rating agency downgraded Ireland’s long-term sovereign credit rating to AA- from AA with the outlook negative, the lowesxt since 1995. “The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility over the medium term,” said Trevor Cullinan, an S&P credit analyst, in a statement.

S&P said it may cost as much as 50 billion euros to recapitalize Irish banks. Next September is a critical month: Irish banks have about 30 billion euros of government-guaranteed debt securities to roll over – a wall of maturing debt.

Putting in context today bad news, janelanaweb.com listened to Marc Coleman, Economics Editor, Presenter “Coleman at Large”, Newstalk 106-108fm, also Economics columnist with ‘The Sunday Independent’ and author of several books about the Irish economy.

Marc Coleman advice: “Keeping our nerves won’t prevent another global recession if indeed this is what is going to occur. But it will help a recovery if this is what is in store. It will also help to prevent the interim situation where a recovery is possible, but fails to happen because of poor confidence.”

Coleman’s statement © Janelanaweb.com, 2010

“If forecasts for a global recovery are wrong, then like other countries experiencing difficulties a default in Ireland cannot entirely be ruled out. Recent developments in world share prices show how vulnerable perceptions are to the possibility of a double-dip recession in the US.

At the same time overreaction to single news events can damage confidence and become self-fulfilling. For this reason, it’s crucial to qualify each bit of negative short-term news with a focus on long-term fundamentals.

For Ireland those fundamentals are:

1. Ireland is the only one of the five countries identified as in trouble (Portugal, Greece Ireland, Italy and Spain) as expected to have a healthy positive balance of payments surplus;
2. The size of the fiscal deficit – some 21 billion euro – is composed of roughly one third of capital spending while the remaining third is a cyclical deficit that should, provided a recovery re-occurs, disappear by 2014. The remaining structural deficit is of the order of 7 billion. Judging by the size of the structural correction in the last budget alone – a structural reduction of about 3 billion euro, this problem will be cut in half by the time of the next budget (these are round figures, but broadly accurate);
3. The adjustment to date in the last 2 [fiscal] years (2008 and 2009) amounts to 5 per cent of GDP and is the largest of any European country in recent and possibly modern fiscal history;
4. Ireland is expected to grow by 3 per cent next year, twice the euro zone average.

Another point is that Ireland does not control the world economy. It remains vulnerable to global events. Having said this the presence of US multinationals is less dependent on recovery in the US and far more tied to the stronger recovery in Asian and European markets for its high tech output.

Being a smaller economy, its stock market has risen and fallen in a more volatile manner than other larger and more sectorally diversified countries. The negative side of this is clear from the relative size of the fall in the Dublin stock exchange. This is strongly influenced by a disappointing performance of a large construction company, CRH, which has a strong impact on the ISEQ index.

The positive side is that provided the world economy does recover, this volatility should manifest itself in a stronger recovery in the stock prices (asset prices being quicker to respond to economic news).

Finally, Joe Stiglitz warnings of a double-dip recession have to be taken seriously. But this warning is of a possibility not yet a probability. There will be more ups and downs like the events of the stock market today (which was caused by poor US Home sales data).

Keeping our nerves won’t prevent another global recession if indeed this is what is going to occur. But it will help a recovery if this is what is in store. It will also help to prevent the interim situation where a recovery is possible, but fails to happen because of poor confidence.”

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