Arthur Beesley: market ructions over Greece has ominous echoes of 2008

The outbreak of market ructions over Greece carries ominous echoes of the turmoil surrounding the global financial crisis of 2008 and, later, the sovereign debt emergency in the euro zone.

Each of those events had dire consequences for Ireland, with stricken banks taken into State shelter two years before the bedraggled State itself was led into the EU/IMF bailout programme. In question right now, as Athens skirts the very edge of the “Grexit” abyss , is whether any worsening of the present volatility upends financial market confidence in Ireland’s nascent recovery.

It’s too soon to tell. A last-gasp retrieval of the situation in Greece remains possible, averting disaster for Greeks themselves and for the wider euro zone. But the country’s departure from the single currency is a greater risk now than at any previous time in the saga, raising concern about contagion to other vulnerable countries in the euro area.

Ireland is not immune. As if to prove the point, Irish bank shares have taken a hit today in line with international conditions. Bank of Ireland shares dropped more than 5 per cent after the market opened, although the decline eased to 3.4 per cent at lunchtime. It was the same for Permanent TSB shares, down 4.65 per cent in early morning and down 2.27 per cent at lunchtime.

Although Ireland’s huge national debt means the State will be at the mercy of money markets for decades to come, Irish borrowing costs were largely unperturbed this morning. Italian, Spanish and Portuguese bond yields were first to jump, illustrating their vulnerability events in Greece. German borrowing costs eased, a reflection of the country’s safe have status in times of woe.

But the interest on Irish 10-year bonds, the standard barometer of the State’s creditworthiness, was largely unchanged this morning at 1.6 per cent.

This might well raise questions as to whether Ireland has finally broken free of the “PIIGS” group of euro weaklings, which linked the State with the fortunes and frailties of Portugal, Italy, Spain and Greece. It does not.

Ireland remains a minnow in international debt markets and the restoration of stability in the local economy means it’s not immediate source of concern. On a day like today, Ireland is far from a priority for investors .

Some market participants believe it could take a week or two for major investors to fully gauge the impact of events in Greece on Irish bonds. These remain very dangerous times for the single currency. In that context, the absence of drama in Irish bond yields today doesn’t mean we sail on regardless.

If the “Grexit” actually happens, a rise in Irish borrowing costs would appear to be inevitable. True, record low borrowing costs in recent times have eased budgetary pressure on the Coalition. Only in time, however, would it become clear whether a real curtailment of the present fiscal flexibility was in prospect.

Although the domestic economy is expanding at the fastest rate in Europe, Ireland’s public finances and the surviving Irish banks still bear the deep imprint of crisis.

Another outright euro zone crisis would bring clear risks. The big danger here is sustained disruption in Italy or Spain, major euro zone economies which are in the “too big to fail” category. The European Central Bank would expected to intervene heavily if such countries came under market attack but no-one really knows whether the firewall would actually work.

Assuming outright crisis is averted, however, Ireland would continue to be a big beneficiary of the ECB’s current bond buying campaign.

The quantitative easing scheme, due to continue until September 2016, is a major factor in the reduction of market interest rates this year. This will continue to benefit Ireland. Still, the present wave of volatility raises questions as to whether the State would be able to replicate its recent sale of 30-year bonds at favourable rates. In terms of borrowing costs, the biggest impact of a “Grexit” would be on the price of longer-dated debt.

To ease contagion it would be open to the ECB to expand the QE programme and, ultimately, to prolong it. It would also be open to the Frankfurt-based institution to widen its support for commercial banks around the euro zone.

What is more, the Government has plenty cash to hand. The State has already €11 billion in debt this year from a target range of €12 billion-€15 billion. It follows that a sudden shut-down in debt markets could be weathered, at least in the short term.

Ireland is also running a primary budget surplus, meaning the State can meet day-to-day liabilities before debt servicing costs from tax revenues.

The Irish banks themselves have no upfront exposure to Greece. Moreover, their increasing reliance on deposit funding these days means they are less exposed to a sudden jump in borrowing costs in interbank lending market.

At the same time, the Greek situation has clear potential to delay the privatisation of the nationalised Allied Irish Banks. The Government’s preference is to to carry out an initial public offering before the election, but that can’t be done if markets are volatile. While preparations continue for an IPO, events in Greece in coming days could determine whether the plan is delayed.

To the extent that Greece defaults on loans from the euro zone rescue funds, Ireland’s exposure is limited to €350 million. (Ireland participated the first Greek bailout in May 2010 but the State’s contributions were halted when the Irish bailout started five months later.)

While a Greek default on ECB debts could lead to a call for fresh capital from member states, Ireland’s share of the ECB capital is 1.16 per cent. Any fresh Irish contribution would hardly overwhelm the State.