- By Region
Dublin is to unveil a multibillion euro stimulus package later this month in an effort to kickstart its flagging economy and curb unemployment as it presses the eurozone to take over a large chunk of bank-related debts to aid its recovery.
Michael Noonan, Ireland’s finance minister, said on Wednesday that the troika of international lenders – the European Central bank, European Commission and the International Monetary Fund – had approved the stimulus measures as long as Dublin does not breach its spending limits.
“It will be like a parallel capital budget geared towards projects that enhance the capacity of the economy to be more productive, including road and school projects,” Mr Noonan told the Financial Times in an interview.
Figures published a day ahead of schedule by Ireland’s national statistics office and carried by Irish media on Wednesday show the Irish economy contracted by 1.1 per cent in the first three months of the year, compared with the last quarter of 2011. A combination of a slowdown in export growth owing to the eurozone crisis and a depressed domestic economy has caused the unemployment rate to climb steadily to 14.9 per cent.
Mr Noonan said the stimulus package would be financed mainly through funds that would not increase the country’s debt. He said the National Asset Management Agency, the state agency set up to clear toxic property loans off bank balance sheets, would invest €2bn to refurbish property. The European Investment Bank, funds from Ireland’s national pension fund and the proceeds from the sale of state assets would also be used to fund job-rich initiatives in a programme that would be spread over four or five years, said Mr Noonan.
“As long as we can fund [it] off balance sheet and don’t break our expenditure limits in individual departments we have room to invest,” he said.
Mr Noonan said he was pressing for a deal with European authorities for relief on Ireland’s €64bn bank debts that would reduce the country’s sovereign debt below 100 per cent of gross domestic product and help the country to re-enter international bonds markets in early 2013.
“Our debt will peak at around 117-120 per cent of GDP next year and if you go above 100 per cent then it acts as a break on growth,” he said.
“If all the capital we put into the banks was removed from our shoulders it would get our debt down to 80 per cent of GDP. Now it is unlikely someone would be that generous but somewhere between 80 and 100 per cent [is the aim]. I still regard 100 per cent as too high,” he said in an interview.
Mr Noonan said he would meet Mario Draghi, ECB chief, within the next two weeks for talks on the issue.
Ireland’s borrowing costs have dropped to pre-bailout levels since EU leaders agreed a deal at last month’s summit that could see the European Stability Mechanism, the eurozone’s €500bn bailout fund, take over a chunk of its bank-related debt on its balance sheet.
Mr Noonan said Dublin deserved a deal on its bank debt because the ECB had blocked the previous government from burning senior bondholders in Irish banks for fear of contagion spreading across Europe during the early stages of the eurozone crisis.
“We are saying we took the hit for the team and if the rules are now changing then we need to negotiate a deal with you,” said Mr Noonan. “Moral hazard should not just apply to those who borrow recklessly but also those who lend recklessly,” he said.
Mr Noonan said he was confident that the EU summit deal, which was principally agreed to tackle Spain’s ongoing banking problems, would not unravel despite suggestions that some creditor countries may try to unpick the agreement.
He said that he was confident the EU summit deal, which was principally agreed to tackle Spain’s ongoing banking problems, would not unravel despite suggestions that some northern eurozone countries may try to unpick the agreement.
“There is a kind of unwritten protocol in Europe that member countries will be treated equally and if policy develops they’ll be compensatory developments to favour the country whose problem wasn’t addressed [previously],” said Mr Noonan.
He said he was hopeful that a deal on Ireland’s debt could be agreed by October and that the ESM could invest in Irish banks as early as 2013.
But even if the investment by the ESM were delayed while the eurozone put in place a central supervisor for the bloc’s banks, markets would begin pricing in any agreement to transfer the debt from Dublin’s books, he said.
“By January, February or March of 2013 I would envisage that all going well we would be back for a nine- or 10-year bond issue. But if the negotiations culminating in October go well obviously the NTMA [Ireland’s debt agency] could have a more ambitious programme,” he said.
Dublin faces a race against time to re-enter bond markets to pre-fund its exit from its EU-IMF bail out due to expire at the end of 2013.
Mr Noonan said one of the options under consideration for reducing its bank debt was for the ESM to take stakes in Ireland’s trading banks such as Allied Irish Banks and Bank of Ireland, which have received €30bn in state funds. He said technical work was well advanced on restructuring €31bn in promissory notes issued to cover the wind-up of Ireland’s dead banks, Anglo Irish Bank and Irish Nationwide. But he said this work would now have to be re-evaluated in light of the summit agreement.
Mr Noonan also praised the Irish people for supporting the government’s efforts to fix the economy.
“There is a great commitment to sort this out. People don’t want to be floundering in recession for years to come. Taking corrective measures up front is the best approach and they see progress is being made,” he said.