DUBLIN (Reuters) - Ireland said on Thursday it would make a clean break from its EU/IMF bailout next month, forgoing a precautionary credit line that some of its European partners had wanted it to take.
Its prime minister, Enda Kenny, said it was the right decision at the right time for his country.
Three years after being unable to raise a cent on bond markets, Ireland has funded itself into 2015 with timely debt issuance over the last 18 months, helping create a much-needed success story for the rest of the euro zone.
“This is the latest in a series of steps to return Ireland to normal economic, budgetary and funding conditions... We still have a long way to travel but clearly we are moving the right direction,” Kenny told parliament after an unscheduled cabinet meeting briefed by Finance Minister Michael Noonan, Central Bank Governor Patrick Honohan and debt chief John Corrigan.
Ireland’s “troika” of international lenders - the European Commission, European Central Bank and International Monetary Fund - signed off on the last part of the 85 billion euro ($114 billion) aid programme last week, paving the way for Ireland to complete it by the end of the year.
It is the first in the euro zone to emerge from bailouts needed for a variety of reasons following the global financial crisis. Greece, Portugal and Cyprus have also had sovereign bailouts, while Spain has had help for its banking system.
The only issue remaining for Ireland was whether the government would take out the insurance policy of asking for a credit line when the bailout ends. It has decided not to.
ECB President Mario Draghi said last week that a precautionary line would be useful while EU Economic and Monetary Affairs Commissioner Olli Rehn said it may not be necessary.
Debt boss Corrigan, who last month said a credit line would be “a nice club to have in the golf bag”, said in a statement that the government’s decision brought welcome clarity ahead of anticipated normalised engagement with the markets through 2014.
The chief sovereign ratings officer of Standard & Poor’s said on Wednesday that Ireland could refuse a funding backstop without damaging its credit rating.
Ireland’s main opposition party Fianna Fail, which was booted out of power after signing Ireland up to the bailout in November 2010, warned Kenny that the move was a risky one with potential problems ahead for Ireland’s banks and the euro zone.
A government minister dismissed the advice, comparing it to a burglar advising on house insurance.
“There is no sense in this that we will never seek some support in the future. It’s the logical thing to do for now,” said Austin Hughes, chief economist at KBC Ireland.
“It should be a day of satisfaction, not celebration. It’s not a case that our problems are over. The sense we are now into the rosy part of the adjustment process just isn’t true.”
The Irish economy pulled out of recession in the second quarter of this year but still faces challenges, with unemployment above 13 percent and spending depressed by salary cuts and tax hikes. House prices are still nearly 50 percent below their 2007 peak, though have begun to pick up in Dublin.
Bank concerns persist and lenders will complete a review of the quality of their assets - an exercise conducted in advance of Europe-wide stress tests next year - later this month.
While state-owned Allied Irish Banks said in a trading update on Thursday that it was improving in line with expectations, Belgium’s KBC forecast surging provisions for loan losses at its Irish unit.
Noonan, who will join up with fellow finance ministers in Brussels later on Thursday, said the ECB’s decision to cut interest rates last week was one of the final triggers for the decision and that he was very confident it was the right one.
He will present the main outlines of a medium term strategy before Christmas aimed at showing Ireland would continue with its prudent economic policies of the last five years and not return to its boom-and-bust swings of the past.
Noonan’s department said in a statement that Europe’s new stability treaty, the firepower of its bailout fund and the major efforts by the ECB to safeguard the currency would bolster a durable return to the markets.
However, forgoing a credit line means Ireland will be unable to access the ECB’s government bond purchases scheme, the so far unused Outright Monetary Transactions (OMT).
The yield on Irish 10-year debt, which hit a high of 15 percent just eight months into the bailout, has reacted little to the government’s inclination to go it alone and fell a touch on Thursday to 3.54 percent.
“Not taking a credit line is a statement of confidence by the government. It bolsters the sense that Ireland is detaching itself from the peripheral countries,” said Ryan McGrath, a Dublin-based bond dealer with Cantor Fitzgerald.
“I don’t think the government is being rash. The big question is what are the implications for OMT access.”
Editing by Jeremy Gaunt