31 May 2012

Irish vote on austerity in shadow of Greek chaos

As Greece implodes under tough fiscal reform Ireland, the IMF’s ‘austerity poster boy’, votes on belt-tightening measures in a referendum too close to call.

Irish vote on austerity in shadow of Greek chaos

With six glowing reviews from the International Monetary Fund, Ireland has been a model of success in implementing 25bn euros in austerity measures since 2008. That may come crashing to an end, however, when Ireland votes on Europe’s fiscal treaty in the midst of 14.5 per cent unemployment and a 56 per cent drop in property prices since 2006.

If Ireland votes “yes”, that will mean financial stability at the cost of additional cost-cutting. A “no” votes means an uncertain future for Ireland, which depends on the multinational companies that employ one-third of its workers.

Vulture funds and hedge funds specialising in sovereign debt and defaults have been circling since early May when Irish bonds began underperforming on fears Greece’s banking and bond crisis would threaten Europe’s recovery.

Yes and no

“We would expect there would be a sharp sell off of Irish government bonds if there’s a ‘no’ vote,” Owen Callan, senior economist at Dublin-based Danske Markets told Channel 4 News.

Mr Callan is banking on a “yes”, however, noting Ireland’s reputation among market traders as the “austerity poster boy” for hitting all of its IMF deadlines and targets. He expects two-year Irish bonds at 6.25 will fall to 4 per cent as economic confidence rises.

Irish vote on austerity in shadow of Greek chaos

Greece’s legacy: debt

Deadbeat Greece, in comparison, doesn’t even have a government. Its claim to fame is a bunch of ruins and the largest bond default in history. Most of Greece private lenders had to swap $77bn in Greek debt for bonds worth 75 per cent less in a deal that cleared the way for a $150bn EU and IMF bailout.

“If Greece stays in the EU it will take more money from the EU and where will it end? The Europeans will throw more money into Greece and with what view, to make a bad machine work?” Andreas Koutras, a Greek national and London-based banker, told Channel 4 News.

Some Irish “no” campaigners reject the doom-and-gloom scenario the Irish government and fear-mongers paint if “yes” campaigners lose the referendum.

Can Europe survive an Irish exit?

“A disorderly default by Ireland would be extraordinarily expensive,” Terrence McDonough, a National University of Ireland, Galway economist, said, “It is completely unthinkable that Europe would shoot itself in the foot in this way in order to discipline or make an example of the Irish electorate.”

With Ireland’s “undecided” vote estimated at one-third of the country, the referendum was too tight to predict as voters went to the polls on Thursday, Results are expected Friday afternoon.

Only left-wing Sinn Fein and the United Left Alliance have come out against the referendum, however, while almost all the major employers/business groups were in favour. That said, support for Ireland’s coalition Fine Gael and Labour government fell from 37 per cent in February 2011 to 23 per cent six months later and Sinn Fein benefitted most from the disillusionment.

Irish vote on austerity in shadow of Greek chaos

When does ‘no’ mean ‘no’?

There may well be a “no” vote considering Ireland’s track record of voting “no” on EU Treaties. But will “no” really mean “no”? Ireland’s government could decide to ask everyone to vote again until they get the answer the government wants. Sound ridiculous? That is exactly what happened in 2009 when Ireland backed the Lisbon Treaty on EU reform the second time in 18 months the Ireland cast ballots.

There’s no indication of companies relocating to more economically stable countries, nor has there been a Greek-style run on the banks in the weeks leading up to Ireland’s referendum.

“There was a run on the banks in 2010,” Mr Callan said. “But money stopped leaving the country when investors realised there just aren’t many safe havens out there.”