DUBLIN (Reuters) - Ireland’s blueprint for tackling the worst budget deficit in Europe looks impressive on paper but the odds of Dublin getting its shortfall under control by 2014 remain stacked against it.
The four-year plan forms the basis for Dublin’s discussions on emergency assistance, possibly as much as 85 billion euros (71.8 billion pounds), from the IMF and EU.
Here are some reasons why Dublin will struggle to meet its targets:
OPTIMISTIC GROWTH FORECASTS
Investors are unconvinced that the growth rates underpinning the four-year plan can be achieved in the face of a vicious round of spending cuts and tax increases that could tip Ireland’s domestic economy into a prolonged downturn.
Ratings agency S&P said Wednesday Ireland’s growth assumptions were too optimistic. The government is assuming real GDP will grow by an average of 2.75 percent in the years from 2011 to 2014, but S&P said nominal GDP would be “close to flat” over the next two years.
The government-funded Economic and Social Research Institute warned Dublin last month that 15 billion euros in fiscal adjustments risked pushing Ireland into a “lost decade.”
International comparisons do not bode well.
Greece, the first euro zone state to get a bailout, will miss a full-year budget deficit target by about 1.5 percentage points this year due to problems with tax collection, wasteful healthcare and inefficient state firms.
Latvia, Romania and Hungary -- the other European Union states to get bailouts in the current crisis -- have all missed targets for cutting their deficits by big margins and the spending cuts and tax hikes they introduced pushed them into deeper recessions.
Signs of a more sustainable recovery in the United States do offer, however, some hope for Ireland, which is one of the most trade-dependent economies in the world.
BANKS REMAIN THE BIG UNKNOWN
Fears of spiralling bank losses are at the heart of Ireland’s crisis and are unlikely to be fully allayed until the central bank conducts fresh stress tests on the lenders early next year.
Dublin is expected to agree an aid package with the IMF and the EU by Sunday to cover sovereign funding costs and a fresh wave of bank recapitalisations but the terms of any deal will be crucial.
If a “shock and awe” aid package fails to impress investors it will overshadow the government’s fiscal efforts and ensure that the Irish sovereign and the banks continue to get the cold shoulder from foreign investors.
There is a risk that Prime Minister Brian Cowen’s four-year plan will fall at the first hurdle.
Cowen’s coalition government is teetering on the brink of collapse and he may have to rely on the goodwill of opposition parties to get the 2011 budget, which will account for a major chunk of the adjustments, through parliament on December 7.
Cowen has promised to call a general election once the 2011 budgetary process is completed, meaning there will be a poll in February or March.
Given the government’s huge unpopularity, they are almost certain to lose the election, meaning a new administration, with fiscal plans of its own, will be in charge from 2011-2014.
The centre-right Fine Gael party is likely to lead a new coalition government following a general election and it has said it would not be bound by Cowen’s strategy.
Fine Gael’s finance spokesman said Wednesday the European Commission had told it the four-year plan could be renegotiated.
While Fine Gael is fiscally conservative, favouring a heavy weighting on spending cuts and possibly forced redundancies in the public sector, its likely partner in a new administration, the leftwing Labour Party, prefers a less harsh approach.
In reality, a new administration will not have much room for manoeuvre given that the IMF and the European Union will have had a big say in the fiscal measures outlined by Cowen.
The Irish public are angry with how the government has handled the economic crisis but they are resigned to years of fiscal austerity and the risk of social unrest appears low.
EUROPE’S PLANS FOR BONDHOLDERS
Germany wants bondholders to pay up in any future sovereign debt crisis and a proposal for euro zone countries to include private sector liability clauses in their bonds from 2011 could deter investors from taking a punt on Irish debt, complicating its eventual return to the debt markets.
Editing by Jodie Ginsberg
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