Contagion?
Author: Cathy Dixon, director Cunningham Coates
There has been one story dominating all financial headlines for the past week or so: the situation in the south of Ireland. After much speculation the European Central Bank and the International Monetary Fund flew to Dublin for discussions which culminated in agreement for a rescue package. The numbers involved are huge: over €80 billion to help resolve Ireland’s debt problems. The Irish government has unveiled an austerity package of tax rises and spending cuts with the aim of reducing the deficit to 3% of gross domestic product by 2014. Built in to this is the assumption that real GDP (economic growth) will see an increase of 2.75% per annum between 2011 and 2014. This is, needless to say, a demanding target.
Taking several steps back, it seems almost unfair that it has come to this: Ireland was one of the first nations to swiftly implement harsh measures to try and remedy the situation in which it found itself, in the form of severe wage cuts in the public sector and savage austerity plans. This contrasts markedly with other nations which have experienced serious civil unrest at the suggestion that the retirement age might have to rise (to levels below ours) and other austerity measures. Ireland has now seen its property prices plummet by almost 50% which is not a unique problem, but it also has two other specific worries. One is the promise to guarantee loans to and deposits in the banks, which means that for every person in the country there is a potential liability of €10,000. Once again we are back to the almost unthinkably massive figures. The other specific problem is the political one. The current government is operating with a very slim majority and the announcement this week that the Green Party is effectively withdrawing from the coalition and the defeat of Fianna Fail in the bi-election in Donegal might be taken as a reflection of the country’s current views.
What is the impact on the wider European zone and indeed further? For the UK the offer of help from the government does appear to have some self-interest behind it. Ireland is our largest and most important trading partner and a downturn in its fortunes has an inevitable (and significant) knock-on effect. To put it into context, last year the UK exported three times as much to Ireland as it did to China. As far as the rest of the Eurozone is concerned the fear dominating is that the problems in Greece and now Ireland will not stop there but will spread to other countries: the next potential candidate being Portugal, followed by Spain. This would lead to massive problems, with many commentators already predicting the demise of the Euro in its present form. The interdependency of European countries is significant in terms of finance and calls into question how far this will spread. Already debate that a two-speed euro will emerge is circulating, but to date this is only speculation.
What we do know is that financial markets are understandably nervous: yields for Irish, Portuguese and Spanish bonds have surged to their highest levels since the launch of the euro. We are facing a crucial few weeks and are likely to see heightened levels of volatility in all markets.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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