Saturday, December 1, 2012

Give a Dog a Bone

From Citi's sweeping preview of what's in store for 2013 and beyond:
We have long argued that we consider the fiscal trajectories in Ireland and Portugal to be unsustainable, despite the fact that both countries have generally complied with the conditions of their existing troika programmes. In both cases, we expect extensions to their currently existing bail-out programmes on their expiry in late 2013 and 2014, respectively. Both countries grapple with the strongly contractionary effects of deleveraging by a highly indebted private (household and business) sector and of fiscal tightening. Of the two countries, Ireland is in a stronger position, as its economy is more competitive (with a current account surplus and the economy is not in recession), it has met fiscal targets and austerity fatigue is moderate. But despite years of austerity, Ireland’s fiscal deficit remains the highest in the EA (above 8% of GDP in headline terms and 7-8% of GDP in structural terms), growth is highly dependent on external demand, and contingent liabilities to the banking sector remain high. In the light of Ireland’s commendable performance in meeting programme targets so far, we expect that it will be allowed a restructuring of part of the €64bn of debt incurred through bank bail-outs (e.g. through maturity lengthening and coupon reductions on its outstanding promissory notes) in 2013 and that its full troika programme will be followed by a ‘conditionality lite’- type (ECCL) programme, similar to the case of Spain and Italy (including potential ECB OMT support). But unless and until Ireland restructures its bank recapitalisation costs or sovereign debt more broadly, the country's chances of regaining fiscal sustainability are low.
Which is why their medium term forecast for Ireland is, well, grim:

Still, they are expecting things to pick up generally from 2015 onwards...

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