DUBLIN (Reuters) - Returning from an annual European trade show last month on a flight packed with successful Irish retailers, Ian Martin felt his country’s battered economy might finally be turning around.
A supplier of first aid and hygiene products to Irish companies, Martin has spent the last four years trimming costs, laying off some staff and cutting the hours of other employees.
Ireland’s government has been doing the same, making inroads into an enormous budget deficit and recapitalizing a near-collapsed banking system. The policies have been painful - the Irish consume 12 percent less than they did in 2007 - but Dublin has won praise around Europe for acting hard and fast.
Unfortunately, it may not matter. The political crisis in Greece and banking woes in Spain now threaten to end the modest Irish recovery spotted by Martin on last month’s flight.
“I think if there is a major crisis, people will literally stop spending money. That little bit of confidence that was coming back will be gone,” said Martin, who employs 20 people in three cities.
“It is the last thing we need, we have done as we’re told and we’re still not really coming out of it. It would really just be a further nail in the coffin.”
Martin is not the only one in Ireland watching developments in Greece and Spain with horror.
Ireland’s government oversaw a return to mild economic growth last year but it is quickly learning that its own policies alone will not fix Ireland’s debt pile, which will peak at 120 percent of GDP next year.
The country desperately needs two things: a stronger global economy so its exporters can begin selling more stuff, and a normalization of sovereign debt markets so Dublin can begin borrowing again and exit its international bailout on schedule next year.
Neither appear likely.
“VERY, VERY, VERY DIRE”
Irish borrowing costs have risen sharply recently as policymakers openly contemplate a Greek exit from the euro zone. Yields on Dublin’s benchmark 2020 bond jumped by more than 60 basis points over two days in mid-May to hit a four-month high of 7.62 percent.
More worryingly, short-term borrowing costs showed signs recently that they could soon exceed those on longer-term bonds, a sign that investors are starting to price in the likelihood that Ireland will need further aid when its 67.5 billion euros of EU/IMF loans run out.
It is an abrupt end to a bond market run where yields more than halved over the course of nine months. That had been the reward for meeting every bailout target set, securing a cut in the cost of official funding and drawing private investment into the only bank not run by Ireland’s government.
Mindful that yields on 10-year money stood above 14 percent at another moment of panic for the euro zone last July, Ireland’s 15-month-old government is urging patience. For now.
“When we came into government, we were downgraded by all of the ratings agencies over a period of six months even when we felt we were getting a handle on things. It took quite a while for that to filter out and be recognized,” European Affairs Minister Lucinda Creighton told Reuters.
“I think there’s a likelihood that the same thing will happen in Spain and I think that the government have to be given breathing space to implement reforms and conduct the independent stress testing of its banks.”
Ireland’s banks have no direct exposure to Greece and exporters ship less than 0.5 percent of all goods there. Ireland’s Finance minister Michael Noonan quipped earlier this month that the direct impact of a Greek exit from the euro could be limited to the availability of feta cheese on supermarket shelves.
But Creighton says a Greek exit would be “very, very, very dire.”
Investors would likely cast around to consider what other countries could be forced to quit the currency and Ireland’s risk premium would probably rocket.
Deposit holders who stayed put when Irish banks lost more than 100 billion euros of funding in late 2010 may think again and foreign companies considering following firms such as Pfizer and Google to set up in Ireland’s business-friendly, low corporate tax economy, might reconsider any move.
Investment from such multinationals, whose employees account for almost 10 percent of Ireland’s workforce, is a key plank of Ireland’s business plans, helping to take the sting out of austerity measures by creating jobs - 13,000 in the next year, the government hopes - and keeping export activity buoyant.
The most immediate threat is next week’s referendum on changes to Europe’s fiscal treaty. A ‘no’ vote, like a Greek exit, would see big firms rethink investments, the head of the agency tasked with attracting them to the country said recently.
The chairman of Ireland’s American Chamber of Commerce Peter O‘Neill agrees.
“If we end up in that scenario, that’s going to drive uncertainty and what that’s going to mean is companies who are making investment decisions are maybe going to pause and ask, ‘Am I making the right decision?'” said O‘Neill, who employs over 3,000 workers as head of IBM’s Irish operations.
What matters most, though, is economic growth. When you export more than 100 percent of your total production, instability abroad hurts.
The slowdown in Ireland’s trading partners, which dragged the country back into recession in the last quarter of 2011, forced the government to revise down its forecasts at every turn over the past 12 months. Now GDP is set to grow at a modest 0.7 percent again this year.
That is still better than most euro zone countries and Ireland also has the distinction of being the only country in the monetary bloc showing growth in the amount of goods and services companies are purchasing.
But relative performance can only get you so far.
Irish exports to the euro zone were flat in the first quarter of 2012, figures that will likely worsen if there is prolonged turmoil in Greece or Spain.
Exporters like Willie Wixted are already planning for such a situation.
Wixted is the co-founder of ABC Nutritionals, which makes sports, diet and nutrition products and is the very definition of Ireland’s economic model. Operating for just five years out of county Clare in the mid-west, his company already exports to 16 countries and has revenues growing at 50 percent a year.
With a big client in Greece and one in Spain too, ABC knows how exposed the Irish economy is to events elsewhere.
So Wixted spent part of the last month in Germany, teaming up with Irish trade officials there in a bid to enter its 17th market and offset potential problems in southern Europe.
“The Greek issue has been on the table for the last two years, and we’ve been diversifying our business - that’s what we always do. You’re always evaluating the environment and looking to see where the threat is,” Wixted said at the plant in the town of Shannon where he employs 13 people.
For Wixted, a Greek exit would be painful but not fatal.
“It would be crippling but we’d continue to walk with a limp,” he said.
Additional reporting by Lorraine Turner; Editing by Sophie Walker