By Jack Duffy

PARIS (MNI) – Ireland, which is set to unveil an austerity budget
for the fifth straight year on December 5, is reaping the benefits of a
leaner more competitive economy, leading some European officials to hail
the start of a Celtic comeback.

Ireland’s merchandise exports hit a record E9 billion in August and
its current account surplus is expected to top 3% of GDP next year. Unit
labor costs in some high-tech fields like medical products have been cut
nearly in half since 2006. And house prices turned up in September, a
sign Ireland’s devastated property market is beginning to stabilize.

Yet the Irish economy avoided slipping into recession only by the
narrowest of margins in the second quarter, as the export gains were
cancelled out by weak demand at home. The government remains hobbled by
E190 billion of debt, amounting to 120% of GDP, and Irish households are
struggling with a debt burden nearly as high.

“The best one can say is that we are at the end of the Celtic
collapse,” said Seamus Coffey, a professor of economics at University
College Cork. “There are no signs yet of a Celtic comeback – the data
don’t support it.”

Ireland’s economy is expected to grow by 0.4% this year and 1.4% in
2013, according to the so-called Troika, which is comprised of officials
from the European Commission, the International Monetary Fund and the
European Central Bank. At least another E3.5 billion will be cut from
the government’s 2013 budget to meet the Troika’s demand that Ireland
cut its deficit from 8.6% this year to 7.5% next year.

The government in Dublin passed the eighth review of its E85
billion bailout program this week, and Finance Minister Michael Noonan
said he had begun talks with the Troika about the assistance that will
be available to Ireland when it exits the program at the end of 2013.

The danger, according to Coffey and other economists, is that
Ireland could remain stuck at a no- or low-growth level if weaker demand
from the UK and the Eurozone caused its export engine to falter. In that
case, debt could rise to levels that would prevent Ireland from
regaining full market access when its bailout program ends next year.

“It is unlikely that private lenders would finance Ireland with a
debt ratio of 130% to 140%,” Coffey said.

To be sure, Ireland has some advantages over its Eurozone partners.
Twenty percent of its exports go to the United States, where it is
benefiting from a euro exchange rate that has dropped from $1.60 in 2006
to around $1.30 today. Prime Minister Enda Kenny has also fiercly
resisted European pressure to raise the country’s 12.5% corporation tax
rate, which lures many multinationals to set up their European bases in
Ireland.

But negotiations with the EU and the European Central Bank to
reduce the burden of the E64 billion that Ireland had to pump into its
banks have dragged on for 18 months. The deal has become bogged down in
a debate over whether the European Stability Mechanism should be allowed
to recapitalize banks retroactively, thus relieving government balance
sheets of the related debt. Noonan is set to press the case with German
Finance Minister Wolfgang Schaeuble when they meet on Monday.

Both Irish government and EU officials say work on a potential deal
is continuing, but there is no talk of any specific deadline.

“The budgetary arithmetic will be based on the status quo, but we
are obviously trying to get the best deal we can for the Irish
taxpayer,” said Paul Bolger, an Irish Finance Ministry spokesman.
Officials are hoping for a deal before March 31, when then next E3.1
billion interest payment is due on some E30 billion in promissory notes
that the government issued to rescue Anglo Irish and other sick banks.

Economists say that refinancing the promissory notes – whose annual
interest cost nearly equals the budget cuts demanded by the troika – is
now seen as much more important than having the ESM buy part of the
government’s stakes in Irish banks.

“There is an argument to be made that now is not the right time to
sell off the Irish banking sector,” Austin Hughes, chief economist at
KBC Bank in Dublin. “You are getting rid of debt but your are also
getting rid of a potentially valuable asset at fire sale prices.”

Both German Chancellor Angela Merkel and French President Francois
Hollande have said that Ireland is a “special case” because its
taxpayers were forced to bear the full brunt of its banking system
rescue and so now deserve debt relief.

Irish and European officials say that a global deal to resolve all
of Ireland’s “legacy debt” issues may not be possible in the short term,
but that agreement on specific issues, like refinancing the promissory
notes, still can be achieved.

“Europe wants Ireland to emerge from the bailout as a success
story,” one Irish government official said. “That is a big advantage for
Ireland in the negotiations.”

–Paris newsroom, +33142715540; jduffy@marketnews.com

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