Tags: Ireland | Plans | 8.5 Billion | Budget | Cuts | 2011

Ireland Plans $8.5 Billion in Budget Cuts for 2011

Thursday, 04 Nov 2010 02:55 PM

Irish Finance Minister Brian Lenihan plans to slash the budget deficit by 6 billion euros ($8.5 billion) in 2011 as he fights to save the nation’s economic independence.

The budget shortfall will be reduced to between 9.25 percent and 9.5 percent of gross domestic product next year, the Finance Ministry in Dublin said in a statement today. The underlying deficit this year will be 11.9 percent, or 32 percent when the costs of the bank bailout is included. The savings amount to about 3.6 percent of the economy and Lenihan will publish details on Dec. 7.

As the country’s borrowing costs soared, the government last month said it needs 15 billion euros of savings over the next four years to reduce its deficit to 3 percent of GDP. The country’s tax take plunged as the economy once known as the Celtic Tiger suffered its worst recession on record, sparking investor concern it may be forced to follow Greece and seek aid.

“It’s ambitious. It’s intended to deliver a clear statement of intent,” said Austin Hughes, chief economist at KBC Bank Ireland in Dublin. “The critical question can it be attained. We need to see a little bit more in terms of the detail.”

Irish 10-year securities fell for an eighth day, the longest streak in two years, pushing the yield on the debt up 20 basis points to 7.77 percent. The spread over German bunds rose as much as 23 basis points to 526 basis points, according to Bloomberg generic data.

‘Serious’

Brian Devine, an economist at NCB Stockbrokers in Dublin, said today’s announcement may do little to lower Ireland’s borrowing costs.

“There is no doubt that Ireland is serious about tackling its fiscal deficit,” he said in an e-mailed note. “The market doesn’t seem to care though -- events have surpassed the unveiling of a credible, conservative multi-year budget.”

European Central Bank President Jean Claude Trichet said Ireland’s fiscal problems are not comparable to those of Greece, which was required to seek a bailout earlier this year.

“I would not make such a comparison,” Trichet said in a pool interview in Frankfurt today. “We have situations that are very different by many means. The Irish situation is more of a commercial banks nature in comparison with the Greek situation.”

Budget Battle

The mounting burden on Ireland of bank bailouts is weighing on investors. The cost of saving lenders such as Anglo Irish Bank Corp. may be as much as 50 billion euros. The government in September canceled debt auctions for the remainder of the year and said it was “fully funded” through the middle of 2011.

Lenihan may face a fight to pass the budget after a Nov. 25 election to fill a vacant parliamentary seat. The vote threatens Prime Minister Brian Cowen’s majority in the parliament, where he has the support of 82 lawmakers, including independents, compared with 79 for the combined opposition.

Credit-default swaps linked to Irish debt rose 21 basis points to 581 today, according to CMA prices. A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

“We have little doubt that Ireland’s fiscal position is unsustainable,” said Stuart Thomson, a fund manager at Glasgow- based Ignis Asset Management, who helps oversee about $110 billion. “At some point in the next two years, you will find they will be forced to borrow from the European Financial Stability Fund.”

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Irish Finance Minister Brian Lenihan plans to slash the budget deficit by 6 billion euros ($8.5 billion) in 2011 as he fights to save the nation s economic independence. The budget shortfall will be reduced to between 9.25 percent and 9.5 percent of gross domestic product...
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Thursday, 04 Nov 2010 02:55 PM
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