BUSINESS

EU-IMF officials approve more loans to Ireland as 2011 deficit falls below 10 per cent

01/19/2012 10:29 EST | Updated 03/20/2012 05:12 EDT
DUBLIN - Ireland has passed all austerity goals required to keep international loans flowing, having cut its 2011 deficit back below 10 per cent of the value of the economy, the government and its international creditors said Thursday.

Senior officials from the so-called "troika" — the European Union, International Monetary Fund and European Central Bank — told a Dublin press conference that Ireland was ahead of its deficit-cutting targets required under terms of its November 2010 bailout.

However, the international donors warned that Ireland could expect only tepid growth of 0.5 per cent in 2012, half their previous forecast, which will make it even harder to achieve the next end-of-year deficit target of 8.6 per cent of GDP.

"In this more challenging environment, maintaining Ireland's track record of strong program implementation remains key to sustaining recovery and achieving Ireland's return to capital markets," the troika said in their prepared statement.

Finance Minister Michael Noonan said Ireland had impressed the troika by its achievement of a 2011 deficit below the goal of 10.6 per cent of GDP. The 2010 deficit had surged to a eurozone-record 32 per cent, chiefly because of exceptional costs of rescuing six banks.

Noonan said the treasury was already planning to return to the bond markets in the second half of 2012 by selling short-term bonds. Ireland exited those markets in September 2010 as its cost of borrowing soared above 7 per cent.

He noted that Ireland's existing medium-term bonds were currently offering yields of between 6 per cent and 7 per cent, so if the Irish treasury went back into the market today it would be able to sell short-term paper at "substantially less than 6 per cent."

Such a price would still be much higher than the EU-IMF loans, which command average interest rates of 3.3 per cent.

Thursday's successful review, the fifth since January 2011, means Ireland will receive another €9.7 billion in loans from the total €67.5 billion ($87 billion) credit line. The EU says Ireland already has received €38.2 billion of that total, leaving less than half to keep Ireland funded until the end of 2013.

Noonan said Ireland's better-than-expected performance was achieved, in part, because its export-driven economy resumed growth in 2011 after three years of contraction.

The November 2010 agreement challenges Ireland to reduce its deficit to below 3 per cent of GDP, the normal eurozone limit, by 2015. The goal requires Irish GDP to keep growing — an uncertain prospect given Ireland's reliance on growth in its two biggest export markets, the United States and United Kingdom.

Ireland reported a record trade surplus Wednesday on the back of strong export growth combined with continued weakness in imports, a sign that Irish consumers have been battered by three years of tax hikes and spending cuts.

Ireland, a country of 4.5 million people, runs the second-strongest trade surplus in the European Union behind export powerhouse Germany. Nearly 1,000 foreign multinationals have made Ireland their EU base because of its 12.5 per cent rate of corporate tax, less than half the western European average.

The Irish have repeatedly rebuffed French and German pressure to raise their rate, and Irish newspapers reported Thursday that the two EU giants intend soon to resume lobbying Ireland on the sore point. Germany and France complain that Ireland's low rate amounts to unfair competition for wooing U.S. investment — and, because of the bailout, is now being subsidized by French and German taxpayers.

In parliament, Deputy Prime Minister Eamon Gilmore told lawmakers that Ireland would not raise its 12.5 per cent rate regardless of how popular such a move might be in France or Germany. He referred to upcoming elections this year in both countries.

"Our position is not going to be dictated by the electoral cycle in any other member state," Gilmore said.