Markets react to plan's publication

 

International markets reacted with caution to the publication of the Government’s four-year plan for the economy

The yield on 10-year Irish bonds was 8.886 per cent, up 0.471 per cent throughout the day. The spread to the bund was 617.6 basis points.

The Irish stock market rose by just under half a per cent, adding 13.29 points to close at 2677.19, despite an earlier slump in the value of bank shares.

Bank of Ireland was down 11 per cent to 26.7 cent, clawing back some of its losses throughout the session. Irish Life and Permanent fell 16.3 per cent to 63 cent. AIB, meanwhile, gained 3 per cent to trade at 34 cent.

In the four-year plan, the Government said real gross domestic product will grow by an average of 2.75 per cent in the years between 2011 and 2014. Real GDP is expected to grow by 1.75 per cent next year, after falling 2 per cent this year.

However, Citigroup analysts said the forecasts were “probably too optimistic”, given the substantial fiscal tightening, high private debts and weakened Irish banks.

“Hence, we suspect that Ireland will probably still fail to meet its fiscal targets by 2014,” Citigroup said in a note.

The plan includes measures to claw back €10 billion through spending cuts and another €5 billion in tax increases.

"We have to deliver on this stuff and at least set out some kind of road map that we intend to follow," said Alan McQuaid, chief economist at Bloxham Stockbrokers. "It won't solve the euro zone problems" because "the market now is sniffing blood and it's looking for a big fight".

He agreed that the growth targets were optimtic, but noted developments on the export side had been positive.

"So it’s not beyond the realms of possibility that GDP growth may turn out to be higher than anticipated. But, whether a strong export side generates enough tax revenue to bring our budget deficit back into balance is another question," he said.

"We will need to see a strong pick-up in the level of employment over the next few years. The Government believes the unemployment rate will fall from 13.5 per cent in 2010 to 10 per cent in 2014, though that again may be on the optimistic side unless there is significant emigration over the period."

Standard and Poor's analyst Frank Gill said key risks for Ireland are related to economic growth and unemployment.

"The key risk is the macro risk," Mr Gill said at a conference call from London today. The country will probably receive a rescue package worth as much as €90 billion, he said, adding that there should be "sufficient policy consensus" among TDs on the fiscal program.

He said Ireland's situation is "very, very different" to Portugal's environment. Regarding Spain, he said the budget is narrowing and their external position has improved as well. “There's evidence of a stabilisation of the macro outlook for Spain while Portugal is at a different stage," he said.

Additional reporting: Bloomberg