Courtesy of Bernier/Wikimedia Commons
Ireland has become the second European country to ask for a bailout this year. Links between the Irish and Polish economies are minor and the effects of Ireland’s economic turmoil on Poland have been limited so far. Nevertheless, Ireland’s difficulties have increased uncertainty, and raised the specter of a wider European economic breakdown.
Celtic tiger under fire
Once among Europe’s fastest-growing economies, Ireland agreed last week to negotiate an estimated €80-90 billion bailout with the EU and the IMF.
“The European authorities have agreed to our request. A formal process of negotiation will now commence with the European Commission and the International Monetary Fund in liaison with the European Central Bank. I expect that agreement to be finalized shortly,” said Irish Prime Minister Brian Cowen.
Experts have been quick to differentiate Ireland’s problems from the Greek crisis. While Greece lived above its means, covered up its real level of debt and now faces social unrest against crucial budget cuts, Ireland is struggling with a crisis mainly limited to its banking sector. The Irish government has also already made €15 billion in cuts over the last two years and has announced a further €15 billion in spending cuts and tax hikes until 2014.
So far global markets have shown little sign of panic and experts are unconcerned that Ireland’s situation could derail Poland’s recovery.
But there is general apprehension that the crisis could spread, first to Portugal and more worryingly, to Spain.
With a total of €750 billion pledged for the stability of the euro zone, bailouts both to Ireland and Portugal could be managed relatively easily. But analysts say European resources would likely be insufficient if the contagion was to spread to Spain.
This is widely perceived as the worst case scenario and explains why the EU – which has agreed to work out the Irish bailout plan by the end of November – and Germany in particular, are pushing for a swift resolution of the Irish crisis. But instability in Ireland’s domestic politics threatens to complicate the matter.
To access the bailout money and calm the markets, Ireland first needs to pass its 2011 budget on December 7, and then quickly thereafter agree to the bailout. But whether Ireland can meet those deadlines is uncertain, as PM Cowen’s deeply unpopular coalition government faces a leadership struggle.
“That is what is really worrying investors,” said Marko Papic, an analyst at American intelligence firm STRATFOR. “Finances are irrelevant as long as Irish political instability persists. Until it is clear who is going to be penning those agreements, we won’t know what is happening.”
What does it mean for Poland?
Fortunately for Poland, experts are not worried about Polish growth for 2011.
“I still see growth in Poland returning to above four percent next year,” said Lars Christensen, chief analyst and head of emerging markets at Danske Bank.
Compared to the Greek crisis, where nearby Southeastern European countries were affected, the risks are small for Poland in the current situation.
But the z?oty, like other emerging market currencies, is moving on global risk sentiment and has already been affected. Polish National Bank president Marek Belka said last week that the Polish currency could be negatively affected due to the Irish crisis.
“All emerging markets are suffering, but the z?oty and currencies in the region are more affected than emerging markets in South America or Asia,” said Przemys?aw Kwiecie?, chief economist at X-Trade Brokers.
Poland could also find it harder to borrow if the Irish crisis leads to difficulties on sovereign bond markets.
Banks, banks, banks
Ireland’s current woes are widely attributed to its government’s attempts to recapitalize the banking sector, bringing a massive fiscal burden upon itself. And as a result of the bailout package, Ireland’s banks are due to face severe restructuring requirements.
But while uncertainty about the quality of banks in Europe is admittedly high – Irish banks did pass an EU-wide stress test meant to reassure investors this summer – the Polish banking sector is perceived as healthy.
“There are concerns over loan losses, especially in terms of consumer lending, but the outlook of the Polish banking system looks quite good,” commented Mr Christensen. “We can’t talk about a similar situation in Poland [to that of Ireland],” he added.
Exactly how much Irish banks owe is still unclear, but their main creditors are German and UK institutions.
Allied Irish Banks, the country’s second-largest bank, sold its controlling stake in Polish Bank Zachodni WBK in September, and any direct exposure Poland would have to potential Irish bankruptcies is minimal. While there has been some direct participation from Irish banks in Poland’s real estate market, the value of their loan portfolios in the country is small.
With Irish unemployment hovering at around 13 percent for months and expected to rise sharply, analysts say it is possible that some of the hundreds of thousands Poles who left for Ireland over the last few years could choose to return.
Poland’s unemployment rate is expected to reach 12 percent by the end of the year and this could potentially pressure the Polish job market, but experts contacted by WBJ did not foresee a massive spike.
Euro crisis
As for euro adoption, the Irish crisis should not change the wait-and-see approach Poland adopted following the Greek debacle.
“Obviously the euro is in a very serious crisis, but I think it’s impossible to see whether this is just a blip or if this will have serious macroeconomic implications for the euro zone,” said Danske Bank’s Christensen, who added that Poland’s cautious attitude was reasonable.
Moreover, the effects of trouble in the euro zone have been unpredictable. While some countries were severely affected by the Greek crisis, it has had little effect on Germany, Poland’s largest trading partner.
Danger of contagion
According to experts, the real fear both for Poland and Europe is the crisis spreading.
Of course, the first danger for Poland would be if its trading partners in the euro zone were hit badly, leading investors to question Polish growth prospects in the short to medium term.
“If the Irish crisis is contained, then there won’t be any problems for Poland. But if uncertainty persists, it could spread to Central European emerging markets,” said Mr Papic.
According to 34 out of 50 economists polled by Reuters last week, Portugal is likely to seek bailout funds from the European Union. Only four believed that Spain would eventually have to be bailed out.
Although specialists contacted by WBJ believed it was too early to judge, the mood was not overly optimistic.
“I think the problem won’t be resolved any time soon,” said X-Trade Brokers’ Przemys?aw Kwiecie?.
He bemoaned the fact that rating agencies have greatly increased turmoil on the markets by first maintaining overly high ratings for too long and then “slashing them vigorously in the midst of the crisis.”
Geopolitics
Although Portugal may end up needing a bailout, Mr Papic said Germany should be able to ensure that the situation in Ireland doesn’t spread further.
Ireland however, is not subject to the same pressures as continental peripheral countries. Its main trade partners are the US and the UK, which makes the country more resistant to pressure form Berlin, Brussels or Paris.
But perhaps more importantly, the Irish government is fully funded until mid-2011, giving it room to maneuver. That may not necessarily be a good thing, though.
“In this case latitude is negative, because it means that Irish politicians have room to delay the bailout in order to get better terms from Germany, and this ability is causing uncertainty in Europe,” said Mr Papic.
Much in agreement with this analysis, European monetary affairs commissioner Olli Rehn declared, “We don’t have a position on the domestic democratic politics of Ireland, but it is essential that the budget is adopted in time.”
Despite important pressures at home last week, Irish PM Brian Cowen refused to step down before the passage of the 2011 budget, but as WBJ went to press the situation remained uncertain.
“This is one of the situations where something that happens on the minute level matters immensely,” said Mr Papic.
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