Ireland will become the first of the most indebted eurozone regions to exit its bailout next month, and has surprised international commentators by refusing a precautionary credit line from the EU.
The facility would have allowed the country access to the European Central Bank’s (ECB) new sovereign bond-buying programme if necessary but would also have tied it to stringent conditions.
Kerry Craig, global market strategist at JPMorgan Asset Management, said that on the positive side, the decision to go for a clean break meant that the Irish Government was confident in how much the economy had strengthened.
“[Ireland] has chosen not to go with the credit line because it wanted to show it can stand on its own two feet,” he said.
“There has been quite a long period of austerity which it is trying to break away from.”
But the flipside of the decision, the strategist explained, was that it revealed “a level of distrust between European politicians and Irish politicians,” demonstrated by how keen the country was to break free from the sanctions imposed by its international creditors.
“The Irish government has taken the view that it has swallowed the bitter pill of austerity and does not want additional restrictions,” agreed Peter Dixon, global equities economist at Commerzbank.
But the economist noted that “Ireland is subject to certain risks that could blow it off course”.
“The debt-to-GDP ratio is still high… Ireland is incredibly reliant on support from foreign-owned firms,” he said.
While the Irish government has said it has enough money for now, the economist thinks 2015 could be the real test.
“If the government runs into difficulty because of capital shortfalls in the banks it will not be in such a comfortable position… [it’s] relying on the faith of the markets,” he said.
However, there are some signs that investors are becoming more sanguine about Irish debt.
Last week the market shrugged off the news that Ireland had decided to go it alone. In spite of being sub-investment grade, Ireland’s 10-year government bonds were last week trading at a yield of 3.55 per cent, much lower than other troubled eurozone countries such as Italy and Spain.
This break with the ECB places added pressure on Portugal, which will have to decide whether it should accept a credit line from the bank when it leaves its own programme next year.
But Jonathan Loynes, chief European economist at Capital Economics, pointed out that Ireland’s economy was very different to that of the other countries still to exit their bailout programmes.
He said, if anything, Ireland had grown too quickly, while Portugal had never really grown and had suffered problems with competitiveness.
“Ireland is often held up as a poster boy for the peripheral economies… but we have disputed that,” Mr Loynes said.
“Ireland is a very different economy. ”
Mr Loynes added that Ireland’s decision was not necessarily a bad thing for Portugal.
“People could either look at Ireland exiting its bailout and think Portugal could do the same, [or] that maybe it would have been better if the ECB had operated an OMT (outright monetary transaction), and shown it to be effective.”