Ireland Plans More Cuts as Savers Question Euro Security

Ireland Plans More Cuts as Savers Question Euro Security
A pedestrian passes closed shop fronts and a market stall in Moore Street, Dublin. Since 2008, Ireland's economy has shrunk about 15 percent. Some 448,000 people are now jobless, translating into a 14.5 percent unemployment rate, up from 4.8 percent in 2007. Photographer: Aidan Crawley/Bloomberg

As Ireland starts laying out plans for a fourth year of austerity, concerns that the future of the euro may be in jeopardy are looming over the budget.

Expenditure Minister Brendan Howlin will detail cuts of about 2.2 billion euros ($2.97 billion) in spending next year in Dublin today, while Finance Minister Michael Noonan will outline about 1.6 billion euros of tax increases tomorrow.

The government is pursuing more cuts as it tries to convince investors that measures worth 20 percent of the economy are enough to win a return to the debt market by 2013 as the euro crisis escalates. In the background, yields on Irish bonds have risen while savers are seeking safety as the topic of euro demise hits the mainstream airwaves in Dublin.

“There is a genuine fear about euro breakup and what might happen,” said Pramit Ghose, head of asset management at Bloxham Stockbrokers, whose fund holding Finnish and Dutch euro-denominated bonds has taken in 2.5 million euros in the last two weeks. “I’ve told clients there is little enough yield, but they don’t care, they just want safety.”

Irish bonds due in 2020 yielded 9.15 percent on Dec. 2, up from 8.24 percent a month earlier as they dropped in price. Comparable Dutch debt maturing in 2021 yielded 2.56 percent, an increase from 2.26 percent over the same period. The year-on-year rate of inflation in Ireland was 2.8 percent in October.

Euro, Not Punt

Irish Prime Minister Enda Kenny said European leaders must make and implement “clear decisions” this week.

“Otherwise, international confidence and investment in Europe will continue to fall,” he said in a televised speech to the nation yesterday. He also said the budget would be “tough” with increases in indirect taxes.

An edition of Liveline, a radio show from national broadcaster RTE and among the most popular in the country, last week was dominated by worried savers asking how to open dollar accounts to protect their money. The government sought to calm fears of a return to Ireland’s old currency.

“We don’t have printing presses printing up worthless punts right now and we don’t intend to have that,” European Affairs Minister Lucinda Creighton told lawmakers on Nov. 29. “Bottom line is that we cannot allow our currency to fail, Germany cannot allow for our currency to fail, nor can France.”

Taking Bets

Dublin-based Bloxham started its fund at the beginning of November and it now has assets of about 11 million euros, Ghose said by telephone on Dec. 2. It also holds U.S. Treasuries and U.K. government bonds, whose yields have fallen to records over the past month on concern about the euro region.

“This is their running-away money, just in the case the Irish euro somehow becomes worth less,” Ghose said.

Paddy Power Plc, the country’s largest bookmaker, has begun offering odds on euro breakup and has taken about 215 bets, according to Ken Robertson, a spokesman for the Dublin-based company. Most punters are backing Ireland to be still using the euro by 2015 at 1 to 4, though the largest bet is a 100-euro wager on an unraveling of the euro region, he said.

Trades at Intrade, the Dublin-based firm whose clients try to predict events, indicate a 59 percent chance that a country will leave the euro by the end of 2013, according to data compiled by Bloomberg.

‘Too Strong’

Germany and France meanwhile are mooting closer economic and budgetary ties to keep the euro together.

“There can’t be a single currency without economies heading toward more convergence,” French President Nicolas Sarkozy told 5,000 supporters in a speech in Toulon on Dec. 1 in comments echoed by German Chancellor Angela Merkel a day later in Berlin. “If living standards, productivity, and competitiveness gaps widen among euro-zone countries, the euro will sooner rather than later be too strong for some and too weak for others, and the euro zone will explode,” he said.

The Irish government refuses to countenance any talk of a breakup, and instead is continuing austerity to prove its credentials as a euro member. Spending cuts and tax increases will amount to about 33 billion euros between 2008 and 2015.

Since 2008, the economy has shrunk about 15 percent. Some 448,000 people are now jobless, translating into a 14.5 percent unemployment rate, up from 4.8 percent in 2007.

Plunging Revenue

With tax revenue plunging and welfare spending surging, the previous Fianna Fail-led government started making cuts in 2008. Since then, the take-home pay of a one-income family on the average industrial wage of 35,000 euros is now 423 euros a month less, the Irish Tax Institute said in November.

“The capacity for people to bear more pain is running out as we approach an overall tipping point in terms of the money that can be taken from them in tax,” said Bernard Doherty, president of the institute, which represents accountants and lawyers dealing with taxation.

Families with two average-income earners have seen their monthly income fall by 613 euros, the institute said. In all, disposable income has dropped by 10 percent since 2008, according to the Economic & Social Research Institute, with another 7 percent to come by 2015.

Sales tax will be raised by two percentage points to 23 percent in 2012, Finance Minister Noonan has said. The government will increase motor taxes and is considering lifting tax on dividends and rental income, as it seeks to cut the fiscal deficit to 3 percent of gross domestic product by 2015. The shortfall this year will be about 10 percent.

Yet for now those efforts are being overshadowed by the unfolding European debt crisis and the potential effects of economic growth in key markets grinding to a halt. The neighboring U.K. last week cut its growth forecast for this year to 0.9 percent and next year to 0.7 percent.

“Ireland is dependent on the rest of the world not imploding for a recovery,” Brian Devine, an economist at NCB Stockbrokers in Dublin. “The restoration of confidence in Europe is as important to Ireland as increasing confidence in our own ability to deliver on stated targets.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE