Thursday is budget announcement day in Ireland. (Update: See below for the actual announcement.)
And given it’s Ireland — this budget, which sets out fiscal plans across 2011 to 2014, will do a lot to determine if the country can avoid a trip to Europe’s bailout fund early next year.
No pressure or anything.
The main fiscal thing to look out for — how much of the four years’ expected €15bn menu of cuts is squeezed into 2011. Numbers vary considerably here — €5.5bn? €6bn? — but at least two things really need emphasising.
First, this is already well beyond the €3bn or so of such front-loading that Irish officials first discussed for 2011. The acceleration here seems to have come from interest payments on promissory notes used to cover Ireland’s bank bailouts. It looks like they’re expected to be much higher. Anglo Irish could indeed yet bring down the state.
Second, Ireland has done this before. Unlike Greece, for example, it’s now been trying austerity for a year; but is only now ramping up to Greek-size deficit reduction.
Or, to put it all in context — note Ireland’s position on this chart from the IMF’s latest Fiscal Monitor report (H/T LorcanRK):
Whiplash is the word. Stay tuned for the budget announcement.
Update: And the answer is — €6bn. Ireland’s €15bn cuts will therefore be front-loaded by 40 per cent. Flashes, via Reuters:
RTRS-RPT-IRELAND IS TARGETING FISCAL ADJUSTMENT OF 6 BLN EUROS IN 2011-FINANCE MINISTRY
RTRS-IRELAND EXPECTS THAT 6 BLN EURO ADJUSTMENT WILL CUT DEFICIT TO BETWEEN 9.25-9.5 PCT OF GDP IN 2011
RTRS-IRELAND SEES REAL GDP GROWTH OF 0.25 PCT IN 2010, 1.75 PCT IN 2011-FINANCE MINISTRY
RTRS-IRELAND SEES REAL GDP GROWTH OF 3.25 PCT IN 2012, 3 PCT IN 2013 AND 2.75 PCT IN 2014
RTRS-IRELAND EYES ADJUSTMENTS OF 3-4 BLN EUROS IN 2012, 3-3.5 BLN EUROS IN 2013, 2-2.5 BLN EUROS IN 2014
RTRS-IRELAND – DEFICIT AT 6.75-7.25 PCT OF GDP IN 2012, 5.25-5.5 PCT OF GDP IN 2013, 2.75-3 PCT IN 2014
Here’s the Irish finance minister’s statement:
The Government has decided that a consolidation package of €15 billion will be required over the course of the next four years if we are to deliver on our deficit reduction target.
A significant frontloading of the consolidation in 2011 is deemed necessary and will underline the strength of our resolve and show that the country is serious about tackling our public finance difficulties.
By the end of 2011, we will have implemented over two-thirds of the overall adjustment and we will be on a path towards renewed budgetary sustainability. Through consolidation we aim to stabilise our General Government debt to GDP ratio over the 2012 – 2013 period, before reducing it thereafter.
The Government has agreed on an adjustment of €6 billion for 2011 and this will reduce the General Government deficit to around 9¼ to 9½% of GDP next year. Taking account of the €15 billion consolidation package, my Department now expects annual average real GDP growth to be 2¾% over the 2011 to 2014 period…
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Heavy, heavy bond rock
One other reason why this budget matters is that it’s effectively going to reboot Irish government bond issuance. Ireland is funded for the rest of 2010, so the government’s debt office took the stunning decision to cancel remaining auctions for the year.
As they explained to us back then, the pause is a ‘breather’ on behalf of the budget. The problem is what’s happened to Irish bonds in the interim.
They have — there’s no other word for it — capitulated across several maturities. Here’s the price on the three-year bond (Bloomberg chart):
And the price on the ten-year bond:
Interesting, because shorter-dated maturities at least come under the default-free window provided by the EFSF, should Ireland access this sometime in 2011.
Never mind Russian sovereign wealth funds, it really is as if everyone is abandoning Irish bonds now, purely because they’re Irish.
So what happens if there’s so much cost attached to the return of debt auctions in early 2011?
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Sending the rock to the EFSF?
Erik Nielsen of Goldman Sachs tackled this question on Wednesday, amid some reflections on the budget process. Thoughts quickly turned towards what the EFSF could do for Ireland.
First, he notes that a large section of the fear covering Irish bonds at the moment has centred on if Ireland can get a budget passed at all:
In my opinion, this is a real risk. A number of independent members of parliament, who have supporting the government in the past, have indicating that they will vote against the budget and some backbenchers have also threatening to revolt. This is, of course, all politics but there is an unpleasant feeling in Ireland now that people are starting to jump ship (without articulating an alternative.)
That’s been compounded on Thursday by the government’s announcement that it will hold a long-delayed by-election on November 25, before the actual budget vote on December 7. More defection risk.
Even so, Nielsen turns to what could happen if the budget is passed:
I then think we should expect a new Irish charm offensive explaining in good details where they stand and how they see the future, e.g. via a non-deal roadshow before year-end. I suspect that this would make a difference in perception, at least for a while; remember the effect when Greece did the same along with the Commission, the IMF and the ECB! If it works, then spreads ought to tighten into next year ahead of the government’s return to the market, and they might very well then make it through to the regular 2012 elections…
But, Greece already had its bailout, and it didn’t exactly get a happy ending after its charm offensive in any case, with a rally long gone by now. Ireland has much tougher persuasion job on its own.
So Nielsen looks at entry into the EFSF given that bond collapse:
The budget is approved, they try the charm offensive, but by the time they need to return to the market (no later than spring), their funding costs remain unsustainable, and they turn to the EFSF and IMF, which will take them out of the market for at least two years (at an interest rate of about 5%). I am almost completely sure that this program would not include any attempt at debt or debt service reduction for their sovereign debt. As soon as this agreement has been reached (i.e. on the conditionality) this ought to lead to a solid rally in Irish sovereign debt…
Now, BarCap have already said that Ireland’s existing austerity measures make it a good (prepackaged, kind of) candidate for the conditionality that would follow IMF and EFSF funds.
Well, it’s one silver lining…
Related links:
Where should Ireland cut its public spending? – Ronan Lyons
When Irish margins are biting - FT Alphaville