Flaws that undermine signs of stability

ANALYSIS:Even excluding the risks of a euro break-up, there are still more weaknesses than strengths in the Irish economy

GOVERNMENT MINISTERS have been talking up the economy of late. They have reason to feel a little bullish, not least owing to much-improved international perceptions of how things are evolving here. But they are at risk of coming to believe their own propaganda. Even excluding the risks of a euro break-up, there are still more weaknesses than strengths in the Irish economy when everything is considered.

Let’s start with the positives.

Perhaps the most remarkable of these is the State’s re-entry to the bond market, all the more remarkable given that even more euro zone countries are being locked out of it.

Each of the three efforts to borrow money from private sources undertaken by the National Treasury Management Agency this year have proved more successful than could have been hoped.

What a difference six months makes. Early this year many, including some serious people, were urging the Government to seek a second bailout without delay. There was zero chance, they stated with great certainty, that the State could regain market access in the foreseeable future. They may well be proved right ultimately, but with so much uncertainty it is still possible that the bailout programme can be concluded on schedule at the end of next year.

Much will depend on how the international investor community views the economy’s performance and prospects. That amorphous grouping’s changed sentiment towards Ireland is best illustrated by developments in the bond market, as seen in chart 1.

Last summer, Irish bond yields were heading towards the stratosphere in near-lockstep with Portugal. They have since fallen sharply. In recent weeks, they have even at times dipped below those of Spain and Italy.

Deposit trends in the Irish banking system also show how foreigners are less frightened about putting their money into Ireland, and leaving it here. The amount of cash deposited in the Irish banking system has remained broadly stable over the past year, in contrast to 2010 and early 2011 when the system haemorrhaged more than one-third of its entire deposit base.

This stability also suggests some decoupling from the Mediterranean periphery. The most recent bout of euro-area panic saw big deposit outflows from Greek and Spanish banks.

Reinforcing the improved sentiment towards Ireland was the outcome of the June 29th euro zone summit. It was not only potentially the most significant advance towards a real solution to the crisis to date but also included an explicit commitment on Ireland’s bank debt – a major diplomatic achievement for which Enda Kenny and Co may not have been afforded all due credit.

But while these developments are all positive, they do not amount to a corner turned. That remains some distance away and might be preceded by a renewed downturn.