John Montgomery reckons he has lost about 350 euros ($479) a month, or 25 percent of his disposable income, because of lower pay and higher taxes since Ireland’s economy began to collapse in 2008.
The father of a 10-month-old baby said he’s willing to take the hit, and more, as long as it helps Ireland avoid a rescue by the European Union and International Monetary Fund. The nation is saddled with a 20 billion-euro budget deficit and costs of as much as 50 billion euros to bail out five of its biggest banks.
“I’d be a patriot like everybody else,” said Montgomery, who works in a Britvic Plc factory in Dublin making 7-Up and Pepsi soda under license. “There is something out there that is spooking people, and they just need to tell us what the problem is. The country is ready to do whatever needs to be done.”
Unlike neighboring Britain in the 1970s, Ireland has never turned to the IMF for aid and the government is determined to avoid being propped up like Greece. Deputy Prime Minister Mary Coughlan said Nov. 4 in parliament that the country’s economic sovereignty was at stake, almost 90 years since winning independence from the U.K. Time may be running out.
Analysts at New York-based Goldman Sachs Group Inc., Credit Suisse Group AG in Zurich and NCB Stockbrokers Ltd. of Dublin said this week the likelihood of Ireland seeking aid is increasing. A majority of global investors, 51 percent, say they think an Irish default is likely, compared with 42 percent who say it is unlikely, the latest Bloomberg Global Poll shows. The quarterly poll of 1,030 Bloomberg customers who are investors, analysts or traders, was conducted Nov. 8.
Irish government bonds gained for the first day in three weeks today after European finance ministers said plans for a new system to handle euro-region debt crises won’t apply to outstanding debt. The premium investors charge to hold 10-year Irish bonds over German bunds, Europe’s benchmark, narrowed to 569 basis points from a record 651 basis points yesterday.
“I sense sovereignty is going to be a big issue: Why did people fight for this when now we are getting ready to give it away,” said Diarmaid Ferriter, a historian and author of “The Transformation of Ireland: 1900-2000.” “The feeling out there is batten down the hatches and take the pain. The problem is that it may be redundant at this point.’
No Aid Request
Officials from the EU were in Dublin this week to review the nation’s deteriorating finances as the government, led by Prime Minister Brian Cowen since May 2008, prepares to push its latest package of spending cuts through parliament in December.
EU Economic and Monetary Affairs Commissioner Olli Rehn said Nov. 8 that the country hadn’t asked for a bailout and he expected it to beat the crisis. The IMF also hasn’t received any request for financial help from Ireland and it is following the situation “very closely,” Carlo Cottarelli, director of the fund’s fiscal department, said on Nov. 5.
“We are a sovereign country and we would hope that our political leaders and masters would have been able to get us out of this mess,” said James Geoghegan, 28, a nurse at University College Hospital in Galway who reckons his monthly paycheck has been reduced by “a couple of hundred” euros.
Beginning in 2008, Ireland cut public-sector pay by about 14 percent, lowered welfare payments for the unemployed and parents, and raised taxes. The approach initially won praise from investors before signs emerged that the country’s financial-services industry may bankrupt the nation.
Finance Minister Brian Lenihan said in September that the final cost of rescuing the banking system may be close to 33 percent of the country’s gross domestic product.
Ireland now is preparing to cut its budget by 6 billion euros in 2011 and then by another 9 billion euros over the next three years, to narrow the deficit to 3 percent of GDP from 12 percent this year. The figure is 32 percent when bank rescue costs are included. Ireland has made 14.5 billion euros of cost savings since 2008, Cowen said Oct. 27.
Declan O’Hara, a 49-year-old taxi driver in the Irish capital, wants to stick with a domestic solution.
“It may be better the devil you know than the one you don’t,” O’Hara said. “Going to the IMF would be unknown territory. Times are already very tough. They might say hand over all your possessions. At least now, we call the shots.”
O’Hara was driving down Dublin’s south quays, the site of dozens of derelict and empty buildings, a legacy of the real- estate bonanza, which abruptly ended in 2008. About 36,000 Irish mortgage holders are in arrears and the country has about 2,800 so-called ghost estates, according to government statistics.
The Irish have endured a bust-to-boom-to-bust economy. The country was the one of the poorest in Europe when it joined the EU in 1973 along with Britain, which went to the IMF three years later. Even with European subsidies, unemployment in the mid- 1980s averaged 16 percent, driving 228,000 people abroad.
In the 1990s, companies such as Pfizer Inc. and Microsoft Corp. helped Ireland export its way into becoming the “Celtic Tiger” and drawing people back to the country as the jobless rate sank to 3.9 percent by 2001. In the decade through 2006, Ireland’s economy grew at an average annual rate of about 7 percent, the fastest among countries that adopted the euro.
“You are smart and stubborn people,” EU Commissioner Rehn said this week. “Time and again, you have proved you can overcome adversity.”
Things went wrong as global credit markets froze in late 2007 and banks struggled to fund their business. Prices for residential property have sunk 36 percent since 2006, based on an index compiled by Irish Life & Permanent Plc and the Economic & Social Research Institute in Dublin. GDP fell 17 percent. The unemployment rate doubled to 13.6 percent, with companies such as U.S. computer maker Dell Inc. shedding jobs.
The Irish government nationalized Anglo Irish Bank Corp. in January 2009 as loan losses spiraled. The government also has taken a 36 percent stake in Bank of Ireland Plc and is preparing to take a majority stake in Allied Irish Banks Plc.
Standard & Poor’s and Fitch Ratings have cut their credit ratings for Ireland since August amid the mounting cost to bail out the nation’s lenders. Moody’s Investors Service said Oct. 5 that the country’s Aa2 rating may be reduced.
Ireland “recognizes one of the things about being an independent country is if you borrow, you pay your way,” John Bruton, prime minister between 1995 and 1997 and the former EU envoy in Washington, said in an interview in his farmhouse north of Dublin. “I don’t think Irish people want that not to be the case in the decade we are 100 years as an independent state.”
Montgomery said he volunteered for an unpaid week of work at Britvic and has given up overtime to keep his job. His wife stays home to look after their child. He said he has stopped paying the premium on his life assurance policy and his family has curtailed vacations and eating out.
“The little luxuries have been curtailed,” he said.
Others say it’s no time to be proud and asking for help from the EU and IMF might precipitate a recovery.
Europe’s sovereign debt crisis erupted in late 2009 after Greek Prime Minister George Papandreou’s newly elected government said the budget deficit was twice as big as reported by the prior administration. The EU and IMF approved a 110 billion-euro emergency aid package on May 2 for Greece in exchange for Papandreou’s agreement to cut public-sector wages and pensions, and raise taxes on fuel, alcohol and cigarettes.
They also set up a 750 billion-euro rescue fund to help countries get out of a Greek-style crisis.
No Sign of End
“It sounds terrible but it might speed things up,” said David Malone, 40, who runs his own corporate communications company in Dublin. “It can’t get any worse. We’re on this road for two years now and there’s still no sign we’re at the end.”
While Ireland says it has the funds to avert an immediate bailout, its cash may run out by the middle of next year unless the country can sell bonds. In September, Ireland canceled bond auctions scheduled for October and November.
The cost of insuring Irish debt rose the most of the so- called euro peripherals -- Greece, Portugal, Spain and Italy -- during the past month as the government struggles to convince investors it won’t be the next Greece.
The difference in yield, or spread, between 10-year Irish bonds and German bunds of similar maturity surged after German Chancellor Angela Merkel said on Oct. 29 that bondholders should foot part of the bill in a new mechanism for rescues being drafted by EU leaders, rankling the Irish.
“It’s not helpful to suggest Europe is going to restructure other countries’ debts,” Lenihan said on Nov. 3. “Ireland has made it very clear we’ll honor our debt and obligations. There is no question of restructuring our debt.”
The Irish spread climbed above 600 basis points this week from 205 basis points on May 3, the day after the terms of the Greek package were announced. Two years ago, it was 84 points.
The cost of protecting Irish debt against non-payment for five years using credit-default swaps was 597 basis points yesterday, lower than the 876 points for Greece, though higher than Portugal at 475 points and more than twice Spain’s cost at 277 points, according to prices from data provider CMA.
Erik Nielsen, chief European economist at Goldman Sachs, said Nov. 8 on Bloomberg Television that there is a “big possibility” that Ireland will need to seek aid from the EU and IMF “unless the markets suddenly calm down.”
That would be “humiliating,” according to Eoin McDevitt, 43, a government worker in Dublin who says he earns 110 euros a week less after two pay cuts.
“Bond yields have risen on issues that aren’t relevant to what we’ve done,” McDevitt said. “We’d involuntarily be giving up control of our own economy to the EU, albeit a friendly body. The IMF makes no secret of not being friendly.”
For Montgomery, it’s time for the Irish to pull together and make sure they keep control of their finances, even if that means enduring higher taxes like the Greeks.
“If there was a general consensus and we all tried to get ourselves out of this mess, we are more than capable,” he said. “We have plenty of ingenuity.”
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