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As the headlines of Greek tragedy and Italian farce continue, one solid national performance has been largely overlooked.
And that’s a pity because Ireland’s relative success seems to show that there is a way out for countries like Portugal, Italy, Greece and Spain as they struggle with their debts. This is something we might expect the euro zone’s leaders to be trumpeting whenever they can.
Of course, like Greece and Portugal, Ireland’s economy was bailed out, back in 2010, and had to promise some pretty harsh austerity to get its cash.
But now, while Greek five-year credit default swaps are trading near record highs, the cost of insuring Irish sovereign debt is around 813 basis points, well below July’s horrible 1180 peak. Irish bond yields have also tumbled. The benchmark 10-year peaked in mid-July at 14.2%; today’s level is 8.50%.
And, even more interestingly, Irish 10-year yields have completely decoupled from those of Greece, according to research from Brown Brothers Harriman.
At the beginning of the year, the 60-day correlation between Irish and Greek 10-year yields was above 0.90. That’s close to exact. Today, the bank said, the correlation stands at -0.42. At the same time, Irish 10-year yields have become significantly more correlated with their safer, German equivalents. That 60-day correlation is near 0.85 today. As recently as late July, Irish bonds were inversely correlated to bunds.
In Dublin, equities are modestly outperforming, too.
They’re down 14% or so for the year, for sure, but that’s OK compared with a loss of 17.6% for the Dow Jones Stoxx 600. The reason for this better Irish performance is that it has found a way to square the proverbial circle: pursue austerity and yet experience growth, according to BBH.
Ireland has enacted at least six packages of savings since July 2008, and yet the International Monetary Fund still expects the Irish economy to expand this year for the first time since 2007. Moreover, despite some gloom and doubt when it was voted in in March, the government appears stronger than most in the region. Despite the austerity measures, Prime Minister Enda Kenny’s popularity appears to have risen in recent months.
That sort of thing is also rare in Europe, where austerity usually equals electoral hatred.
Indeed it seems that the biggest risk to Ireland may now be external.
“Ironically, a significant risk to Ireland and the trajectory depicted here is a further blow-up of other peripheral countries and a further slowing of the euro zone and world economy,” BBH said.
But, for the moment, Ireland is the poster boy for smaller indebted states trying to get themselves out of trouble.
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Here in Ireland, we hope the markets are satisfied with the progress we have made thus far. We would like to return to the markets soon but please do not let the Greek fallout effect our bonds. Thanks.
they will skin us irish soon,.ltos mro enad stuff to happen here in ireland,.,.
I wish I were an Irishmen!
what a difference with the club med countries. too much sun burns the brains.
The U.S should have offered Ireland a bi-lateral loan. The two countries always had close ties, close connections and the U.S also has a large Irish-American population (45 million). I’m guessing the Democrats will live to regret this in the upcoming elections.
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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