Cablegate: The Irish Economy -- Few Options Left

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Classified By: Amb. Thomas C. Foley. Reasons 1.4 (b/d).

1. (C) Summary: Irish government officials told Emboffs that
in the current economic environment it is "almost impossible"
to come up with a plan to right the Irish economy. The
government will not issue a mini-budget early in 2009 but it
looks likely that there will be "adjustments" to the budget
as events warrant. Private-sector economists continue to
revise down their forecasts, with a fall in economic activity
predicted of between 2.5 and five percent in 2009. We are
also watching for potential problems with under-funded
private pension funds and the possibility that the government
and private equity firms may recapitalize Irish banks. In
the medium-term, Prime Minister Cowen's focus now is to
ensure the economy is on a sound footing in order to take
advantage of an eventual upturn in the global economy. In
the short-term, however, the Irish government is left with
few policy options. What is increasingly clear is that they
need to cut public sector spending and be straight with the
Irish public about the state of the economy. End Summary.

The Government's Finances

2. (C) Emboffs met recently with John Shaw and George Shaw
(no relation), economic officials in the Prime Minister's
office, and John McCarthy, the chief forecaster in the
Department of Finance, to discuss current economic
conditions. McCarthy said that forecasting anything in the
current uncertain environment is "almost impossible" and that
the government can only react given the fast pace of the
downturn. He continued that the government's tax take is
currently more sensitive to changes in gross domestic product
than at any time in recent memory. As a result, he predicts
that government revenue from taxes will fall ten percent in
2009. In light of this drop in revenue, he agreed that the
only viable policy response is for a cut in government
expenditure. Otherwise the government will be forced to
borrow to finance current spending, which should be the last
resort, according to McCarthy.

3. (C) Even though the economic situation has deteriorated
rapidly since the government announced its 2009 budget (Ref
B), John Shaw said that there will not be a mini-budget in
spring 2009 as some economists have called for. He did
indicate that there will be "periodic adjustments" in the
government's fiscal stance as events warrant. He also said
that the current wage deal agreed at the social partnership
talks (Ref C) will not be abandoned in spite of the changed
economic landscape. Shaw said that all agreed that this was
the best deal to be had under the circumstances.

4. (C) George Shaw reiterated the government line that Prime
Minister Brian Cowen and Finance Minister Brian Lenihan are
committed to putting in place policies that will enable
Ireland to begin growing as soon as global growth picks up.
Among these policies, he highlighted the government's plans
to foster increased research and development and investing in
graduate-level education. Shaw said that these policies fit
in with the broader policy of "moving the Irish economy up
the value chain." Details of the plan are expected in the
next few weeks but Minister Lenihan has already indicated
that he will look at the tax treatment of intellectual
property in 2009.

The Broader Economy

5. (C) At a recent briefing, Jim Power, chief economist at
Friends First, painted a very bleak picture of the economy
for the next two years. In a trend now common among local
economists, Power revised his growth figures downward for
next year. He expects a fall in GDP of 2.6 percent in 2008
with the outlook not much brighter in 2009 -- GDP is forecast
to decrease by a further 2.5 percent. Like one of the
leading local think tanks, the Economic and Social Research
Institute (ESRI), Power sees a rapid decline in consumer
spending leading to much higher unemployment -- up from 5.9
percent in 2008 to 8.5 percent (or higher) in 2010.

6. (C) Power is not alone in his gloomy outlook. Economists
at some of the leading banks are equally pessimistic. In
fact, Pat McCardle, the Ulster Bank chief economist,
described the deterioration in the economy as "shocking" and
expects a fall in economic activity of close to five percent

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in 2009. He maintains that the Irish downturn is led by a
sharp slowdown in the construction sector and predicts that
the number of new homes completed will not bottom out until
2010. As a result of the property market collapse, McCardle
expects new house prices to fall by 30 percent from its peak.
He also predicts that consumer prices will fall in 2009, for
the first time since 1946.

Issues to Watch

7. (C) We will be monitoring the following issues:

-- Potential Pension Fund Shortfalls: A leaked memo from
Social and Family Affairs Minister Mary Hanafin to her
government colleagues indicated that the deficit on
private-sector defined benefit programs is between Euro 20
and 30 billion and that 50 percent of these programs could
close in the next year. The leading employers association,
Irish Business and Employers Confederation (IBEC), maintains
that the shortfall is due to the rule that a company's
pension plan must have enough assets to meet all of its
current and future benefit responsibilities were the fund to
cease operations. Because of dismal returns (over the last
ten years funds are up only 1.9 percent), employers'
contributions have risen significantly.

-- Capitalizing Irish Banks: Responding to persistent calls
to inject fresh capital into Ireland's moribund banks,
Finance Minister Lenihan said that, while favoring
capitalization from private investors, he would examine
proposals for government investment on a case-by-case basis.
Based on (admittedly) anecdotal evidence, the banks have
become either unable or unwilling to extend credit over the
past couple of months. The Bank of Ireland held discussions
last week with four private equity groups to explore the
possibility of selling off a stake in the bank.


8. (C) The talk of economic doom-and-gloom has taken on a
life of its own, supplanting the perennially favorite Irish
conversation topics -- the weather and politics. While
watchful for the occasional hyperbole, there is much that is
wrong here. The government has no option at this point other
than to cut spending but, of course, that will do nothing to
boost the economy. The financial sector cannot be counted on
to supply enough credit to get the economic engine going
again and the hope that the global economy will rev up soon
looks unlikely at best. Right now the government is bouncing
from crisis to crisis but at some point it needs to get ahead
of the game. Government officials need to better prepare the
Irish public for what lies ahead.

© Scoop Media

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