Ireland to Appease ‘Vigilantes’ as Greece Punished (Update1)
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By Simon Kennedy
Dec. 9 (Bloomberg) -- Ireland is poised to show Greece a way to cut ballooning budget deficits.
Finance Minister Brian Lenihan will today announce plans to cut spending by 6 percent in the face of the worst recession in Ireland’s modern history. On the other side of Europe, the yield on Greece’s two-year note yesterday rose the most since November 2008 as it struggles to convince investors it will be as bold.
Lenihan is trying to shore up confidence in Ireland, once Europe’s most dynamic economy, a day after Fitch Ratings cut Greece by one step to the third-lowest investment grade. A successful strategy may lead investors to reward Ireland and add pressure on Greece to follow.
“The bond vigilantes are back and watching,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “Greece is a worst-case scenario, Ireland’s more solid.”
Lenihan is scheduled to deliver the budget at 3:45 p.m. to the parliament in Dublin, his fifth attempt since July 2008 to fix the public finances. He’s seeking 4 billion euros ($6 billion) in savings to stop the shortfall climbing above 12 percent of gross domestic product.
‘Medicine’
“It is going to be a very difficult budget, but it’s the last of the very difficult budgets,” Lenihan said in an interview with Dublin-based broadcaster RTE late yesterday. “It’s important the public understand this. If we take the medicine now we will bring this economy out of its difficulties.”
While Ireland has lost its top credit rating at Moody’s Investors Service and Standard & Poor’s, Greece is being pushed harder to act after Fitch yesterday cut it one step to BBB+, the third-lowest investment grade. The previous day S&P put the country’s A- rating on watch for a possible downgrade, signaling it may be reduced within two months.
Greek Finance Minister George Papaconstantinou said in an interview with Bloomberg Television today that the country won’t seek a European Union aid package and that there is no risk of default.
“We are doing what’s necessary in order to be out of the woods by ourselves, by our own devices, Papaconstantinou said. “We have no immediate borrowing needs.”
‘Resolve’
While the situation in Ireland remains severe, the government have shown an impressive resolve,” said Goldman Sachs Group Inc. economist Kevin Daly, who favors Irish assets over those from Greece. “This contrasts with the situation in a number of other European countries where, despite similar budget problems, there appears to be a reluctance to acknowledge the problem.”
The difference in yield, or spread, between 10-year Irish bonds and equivalent German bunds was at 172 basis points yesterday. The gap between Greece and Germany reached 225 basis points, the most since April 21.
Ireland’s fiscal problems mounted after a decade-long property boom imploded and the banking system came close to collapse as credit on the international money markets dried up. Greece is suffering after its new government more than doubled the country’s budget deficit forecast to 12.7 percent, exceeding the European Union’s limit more than four times, as revenue fell short of targets and spending increased.
Pay Cuts
Now, Lenihan is planning pay cuts of about 6 percent for government workers, and labor unions are threatening industrial unrest in response.
He also has pledged to slash the deficit to 3 percent of output by 2013, meaning Ireland is facing austerity budgets for the next four years.
“The overriding concern is to cement the financial viability of the Irish state,” said Rossa White, chief economist at Dublin-based broker Davy. “The budget for 2010 is a watershed.”
Greece’s socialist government, elected in October, plans to cut the budget deficit to 9.1 percent of GDP next year from 12.7 percent this year. The plans, including one-off measures and a partial freeze on public-sector pay, “are unlikely by themselves to alter Greece’s medium-term fiscal dynamics” given the prospects of high deficits, debt and sluggish economic growth, S&P said Dec. 7.
“The problems in Dubai and Greece have highlighted that smaller countries with banking and severe fiscal problems will be punished,” White said. “Particularly those that fail to deal with them adequately.”
To contact the reporters on this story: Colm Heatley in Belfast at cheatley@bloomberg.net;
Last Updated: December 9, 2009 04:46 EST
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