Thursday, 14 March 2013

IIF: Greece’s austerity program much harsher than the Irish one

IIF: Greece’s austerity program much harsher than the Irish one
Posted by in Economy
“The fiscal afjustment program for Greece is much harsher than the one for Ireland.” That’s what Jeffrey Anderson, senior director of European Affairs at the Institute of  International  Finance (IIF) stresses in his economy research with the title “Ireland and Greece: A Tale of Two Fiscal Adjustments”.
“Greece and Ireland are generally judged to represent opposite ends of the spectrum when
assessing adjustment efforts made necessary by the European sovereign debt crisis. Bond
markets have responded favorably to Ireland’s relative success, with perceptions of renewed
creditworthiness underpinned by the resumption of growth already in 2011, the first year of
its EU-IMF program.

Renewed bond issuance and greatly reduced bond yields – down to less than 4% in secondary markets on most outstanding issues –point to strong odds that Ireland will exit its reliance on official financing successfully – and
with ample liquidity reserves – when its program expires in December 2013.
Greece, on the other hand, has seen its economy contract by 20% since 2008, causing
unemployment to surge to 26%. Even though bondholders acquiesced to massive,
unprecedented principal reduction via a debt exchange in early 2012 and a sizable debt
buyback nine months later, doubts linger about the sustainability of Greek debt. Renewed
market access remains a long way off. Divergent assessments about the creditworthiness of
Ireland and Greece owe much to differences in their respective growth performances.
Three years into Europe’s crisis, and with worrisome output contractions ongoing in Italy,
Spain and Portugal, the different experiences of Ireland and Greece offer useful lessons. A
more tempered fiscal consolidation has helped Ireland succeed in restarting the growth
needed to underpin debt sustainability and renew bond issuance. Few doubt, as a result,
that Ireland’s official creditors will be repaid in full and on time.
With a much larger initial debt, a larger initial deficit and little saved from the strong growth registered before 2008, the far harsher fiscal adjustment required of Greece has had a much more negative effect on GDP.
This has elevated debt ratios and reinforced doubts about creditworthiness despite fiscal adjustment and principal reductions from private creditors of unprecedented magnitudes.
Applying the Irish example in Greece to help restart growth would require some additional funding. The final cost, however, would be much less than might eventually be needed if output continues to fall and doubts about debt sustainability remain entrenched.”
Full research results here (in PDF)

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