Ireland’s macro-economic landscape has improved dramatically over the last number of years but challenges still remain. Fiscal compliance is the only component fully under the Irish Government’s control. Growth levels will largely be determined by the international export market. Bank recapitalisations represent the great unknown in Ireland’s fiscal horizon.
A prolonged European recession presents the greatest risk for Ireland’s longer term debt sustainability. There is a need for increased domestic growth initiatives in the short term.
The Government’s steadfast commitment to austerity over the last six years now allows for immediate additional domestic growth policies without harming Ireland’s fiscal credibility. Ireland should seek some leniency in its deficit reduction targets, similar to what was granted to Spain in April 2013. Maintaining Ireland’s fiscal credibility is critical but following the stabilisation of Ireland’s finances, fiscal credibility can now be maintained alongside and not at the expense of increased growth initiatives.
Prior to bailout exit, Irish banks will face a second Prudential Capital Assessment Review (“PCAR 2”) stress test this year. The Irish economy and in particular the Irish banks are now in a much healthier position than in 2011 reflecting the very significant degree of stress which has already materialised in the domestic banking sector and any banking capitalisation requirements are likely to be minimal. Following successful deleveraging, where disposal costs were significantly below what was assumed in PCAR 1, both Allied Irish Bank and Bank of Ireland has additional unanticipated capital, ensuring that for the most part sufficient capital should already be in place to meet any potential requirements.
Impairments are set to trend downwards from current levels driven by greater asset price stability and a slower pace of increasing mortgage arrears. Write-off provisions made throughout the crisis remain very limited. The tracker mortgage book remains a legacy drag as well as poor appetite for credit.
Over the longer term, following a return to more normalised growth levels in Europe, Ireland is best placed for potentially faster economic growth than its European peers.