24 September 2013
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Quintas Quarterly Economic Review
by James McCarthy, Investment Analyst

Bail Out Programmes

Of the three bailed out Eurozone countries, Ireland is the only country set to exit their bailout programme by the end of this year. While Ireland still needs to fund a budget deficit, this time it should be financed by the markets and not by official loans. With this development Ireland should no longer have to comply with the harsh economic conditions and monitoring by EU and IMF officials.

While Ireland has had some success with private market funding, the government budget deficit is still above 7% while national debt increased by €11.6 Billion in the first quarter of this year. The country’s debt to GDP ratio is now 125%, or over €200 Billion in monetary terms. However, debt to GNP is over 150%, which may be a more accurate measure of our true debt burden. Ireland still has big liabilities arising from too much public spending. This shortfall in revenue is then financed, which increases national debt. Given the high levels of indebtedness, it is likely that after Ireland exits its current bailout programme, the country may enter another watered down programme with details yet to be finalised.

Further south, Portugal’s bailout programme has run into difficulty with recent political instability adding to uncertainly there. Portugal’s debt to GDP ratio is now almost 130%. In Greece, their public debt is expected to peak at more than 175% of GDP by the end of this year. Growth is an obvious solution towards reducing debt. Yet any growth is unlikely to be very strong. While recent data reveals Eurozone real GDP growth expanded by 0.3% quarter on quarter in the second quarter this year (therefore exiting recession), in year on year terms, GDP still contracted by 0.7%. Domestic demand will likely remain subdued by high unemployment, high debt levels and tight credit conditions. While some support may come from external demand any recovery is likely to remain anaemic and we are likely to see divergent levels of growth across the different Eurozone countries.

Overall the fundamental problem lies with high debt levels and the main solution will likely have to be debt forgiveness. With German elections this month, there was little talk of such a requirement, but the truth may become more apparent now that elections are over.

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