* Debt reduction relies on sustained economic recovery
* Process gives road signs to Portugal, Greece
* Well funded, but concerns linger over banks
By Sam Cage
DUBLIN, Feb 19 Ireland is the first euro zone
country to emerge from a bailout brought on by unsustainable
debt, but the long slog of cutting back what it owes is only
just starting for its 4.6 million austerity-hit people.
How its succeeds or fails in this will be a guide to how
easily other heavily indebted states such as Portugal and Greece
will be able to ease up on austerity as they strive to escape
from their own bailout programmes.
Growth has returned in Ireland. Unemployment is falling and
Irish debt is attracting bumper demand. But the recovery remains
fragile, exposed to shocks elsewhere and needing more money to
be taken from the economy this year to complete rebalancing.
"There's no doubt that with a high debt level, we're exposed
to a shock, but that's going to be the case for probably the
next decade as we strive to bring the debt ratio down," Rossa
White, chief economist of the National Treasury Management
Agency (NTMA), told Reuters.
For the public, that means continued tough times. For
example, public services, particularly health, are still being
cut back, a new property tax will be fully implemented this year
and charges for water supply are being introduced.
The government aims for economic growth of 2-3 percent over
the medium term to start bringing down a debt load that is at
120 percent of national output, versus the 60 percent or less
sought by the European Union for its members.
Dublin forecasts another six years of consistent growth are
needed to bring its debt below 100 percent and while there is no
immediate pressure point, it has to tread carefully with its
battered banks - which could yet need more cash - and in
addressing a funding hump in early 2016.
Dublin's debt ballooned from 47.2 billion euros ($64.7
billion) in 2007 to 192.5 billion in 2012, in large part due to
its rescue of crashing banks, for which it still seeking
That pushed it into an 85 billion euro bailout that was
completed in December. But the banks remain a major headache,
despite having passed a review of their assets late in 2013.
The state holds 99.8 percent in two of the three domestic
lenders, Allied Irish Banks (AIB) and permanent tsb
(PTSB). It would be the primary source of funds should
they need more capital after European Central Bank stress tests
later in 2014, which will assess lenders' ability to withstand
But together with the state's stake of 14 percent in Bank of
Ireland, these holdings are also a major plank in the
debt reduction strategy. The Bank of Ireland holding could be
worth 1.5 billion euros at current prices. The AIB and PTSB
stakes are harder to estimate given they have almost no free
"With the rising property prices, we don't envisage capital
being required in the Irish banks," Finance Minister Michael
Noonan told Reuters.
"But the bottom line ... is if you knew the answer before
the stress tests, you wouldn't have to do the stress tests."
SETTING A PRECEDENT
Ireland has a certain amount of breathing space because
yields on 10-year paper have fallen to 3.3 percent from a peak
above 15. The average interest rate on the whole debt load is
only about 4 percent and the country is already funded into
That helped persuade Dublin not to take a backup credit line
when Ireland emerged from the bailout, relying on the strong
cash position and being able to sell debt on the market.
It is a pointer in particular for Portugal, which aims to
complete its bailout in June.
"Ireland's definitely set a precedent, even the language
around the Irish exit, and I think it's defining the debate
elsewhere," said Mujtaba Rahman, director for Europe at
political risk consultancy Eurasia Group.
But Ireland has one more austerity budget ahead for next
year, taking up to 2 billion euros out of the economy, and with
unemployment still above 12 percent there is still pain ahead
for people who have already endured six years of cuts.
In the EU it trails only Greece, Italy and Portugal in terms
of debt as a proportion of national output, but Noonan is
already talking about easing income tax to sweeten the pill of
cuts elsewhere and bolster still lacklustre domestic spending.
"Challenges remain, risks are there. In Ireland certainly
the debt ratio is now much much higher," said Klaus Regling,
head of the euro zone's bailout fund, on a recent visit.
Dublin's European partners could ease the process if they
agreed to help with the bank rescue, which cost Ireland 64
billion euros - 40 percent of annual output - but there are few
encouraging signs from Brussels.
Ireland says by injecting the cash and not burning bond
holders, it saved the European banking system from contagion.
"Any decision made would have to be unanimous, so it's not
an automatic situation where you ask and you get," Noonan said.
"We're not taking it off the table because we see it as a solemn
But the comfortable financing situation does take some of
the pressure off and the NTMA debt agency will try and ease the
2016 funding squeeze by starting to top-slice the 10.2 billion
euros on a bond maturing in April that year.
"I would see the bigger (economic) threat coming from
external factors, the withdrawal gradually over time of the
monetary stimulus, particularly in the U.S., and whether that
can be handled in an accident free manner," NTMA head John
Corrigan told Reuters.
"We will be entering unprecedented territory."