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OPINION

The Ireland and Portugal Economic Adjustment Programmes

The Ireland and Portugal Economic Adjustment Programmes

During the last month the Greek crisis grabbed the news headlines in Europe and across the globe. A number of legitimate questions have been raised, given the experience that Greece had in the last five years with Troika and the MoUs. Why is Greece, after so many years of tough austerity measures, still struggling with such high levels of unemployment and public debt? Is the structure of the programme itself really the problem, or is it the Greek government’s inadequate implementation? Would the solution be a programme that takes removes all austerity measures? How, then, would fiscal consolidation be achieved without austerity? Then again, why were Ireland and Portugal both able to exit their respective programmes in due time and finance their needs from the financial markets at extremely low rates? Were they able to execute the programmes more efficiently, or did they have schemes with an entirely different philosophy? Was their situation so different that is hard to compare with Greece’s? These are among the many interesting questions raised, which are – admittedly – difficult to answer. 

 

In any case, the purpose of this short article is to shed some light on and document the Irish and Portuguese experience with the “Troika” and their “Memorandums of Understanding”. 

 

The Irish Case

 

Ireland agreed on an Economic Adjustment Programme with its lenders (EU-IMF-bilateral contributions with other countries) in December 2010 for a financial package of €85 billion. The aim of this programme was three-fold: 

 

(1) Restructure the banking sector, 
(2) fiscal adjustment, and 
(3) structural reforms.

 

These were to make the economy more competitive and expected to lead to sustainable growth. 

 

Prior to 2010, the country was suffering from the aftermath of a banking crisis (due to a real estate bubble) that led to recession, increased levels of unemployment, raised debt, and the creation of the NAMA (National Asset Management Agency) to take over the bad loans. 

 

After a period of three difficult years, Ireland successfully completed the programme having met many of its conditions, and is now on the road to recovery. Latest figures show that unemployment has been gradually decreasing and now stands at a rate of 10.5% (January 2015), down from a peak of 15.1% in early 2012. The growth rate in the economy is also picking up with projections for real GDP growth of 4.6% and 3.6% for 2014 and 2015, respectively. 

 

Furthermore, budget deficits are gradually decreasing down to 3.8% of GDP in 2014 from 5.7% in 2013. As a result, the country is now able to borrow from the financial markets at extremely low interest rates which is a sign of reduction of risk (of course, that has to do also with the low interest rate environment that we are experiencing around the globe). The latest rate that is recorded for the benchmark 10-year government bond is at 1.05% for February 24th, 2015. 


The Portuguese Case

 

Portugal agreed to an Economic Adjustment Programme with the “Troika” in May 2011 for a financial package of €78 billion. Again, the aim of the programme was three-fold and similar to other cases. 

 

Prior to 2011, the country faced problems with low economic growth, and excessive budget deficits and public debt. After a three-year period, the country exited the programme in June 2014. 

 

Real GDP growth is now at 0.9% (for 2014), budget deficit is at around 4.8% for 2014, and targeted by the government to drop to 2.7% for 2015, the unemployment level has dropped to 13.5% in the fourth quarter of 2014, down from a peak of 17.5% in the first quarter of 2013, and public debt although still high (at 128% at the end of 2013) is expected to drop and continue a downward path. As a result, the country is now financing its needs from the financial markets and the benchmark 10-year government bond yield is around 2.2% (February 2015). 

 

Thus, my conclusion is that although each situation is different, the programmes implemented by the above two countries helped them restore some confidence in their economy which will lead them to future sustainable growth.

 

George Theocharides is an Associate Professor of Finance at Cyprus International Institute of Management (CIIM) and the Director of the MSc in Financial Services.

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