Irish Economy Risks Downward Spiral: Expert
Ireland’s economy may have been improving since the end of June, but the Celtic tiger is not out of the woods yet, Cormac Leech, bank equity researcher at Liberum Capital, told CNBC.
Although 10-year Irish sovereign bond yields have gone from about 7.2 percent to about 5 percent since June, according to Eurostat, Ireland’s debt-to-Gross National Product (GNP) ratio is still at 150 percent, a ”very uncomfortable level for a country that is struggling to have positive GDP growth,” Leech said.
With rising unemployment and the jobless rate hitting 14.7 percent in August, Irish households could face more pressure, leading to higher mortgage defaults.
Leech warned that if Irish mortgage loans soured further, it could jeopardize the recovery.
“There is a clear sign we’re going to see another leg-down potentially related to the deterioration of Irish mortgages which could quickly add to the load on the Irish sovereign,” he said.
Leech also said it was important that Ireland restructure some of the 64 billion euros ($82.3 billion) the country pumped into its banks during the crisis.
One way to help the economy would be to use the European Central Bank’s (ECB) recently launched Outright Monetary Transactions (OMT) programto indirectly backstop the Irish economy.
“The ECB has a window of opportunity to shift towards an aggressive pro-growth strategy for Europe. If they don’t pursue this, the Irish economy will quickly spiral downwards again (…), GDP growth will slow and deteriorate Ireland's debt dynamics, Leech said”
But he warned that although Ireland tended to err on the side of optimism, “the situation can quickly unravel unless Brussels continues the momentum they’ve when launching the OMT.”
Although Ireland has been plagued by an unsustainable debt burden, which led the country to request a bailout, recent research from Danske bank argued that Ireland is set to emerge from the slump and return to growth in 2013.
Danske forecasted that Ireland’s gross domestic product (GDP) will grow about 0.8 percent in 2013 following the government’s prudent fiscal management, which would help the country narrow its budget deficit from 8.3 percent of GDP in 2012 to 7.5 percent of GDP in 2013.