economics

March 15, 2010

Irish Take Bitter Medicine to Survive the Age of Red Ink

Filed under: Uncategorized — ktetaichinh @ 10:44 pm
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DUBLIN—Debt-laden Ireland is winning applause from financial markets for quickly taking the kind of harsh economic medicine that countries around the world are putting off. But in this newly austere country, people like 35-year-old Robert Peelo are finding little cause for cheer.

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Mr. Peelo, a police officer, expected the government to give him a 6% raise a year ago and build a new station at his post in Dundalk, not far from a town across the border in Northern Ireland where a car bomb exploded in February. Instead, Ireland has cut his take-home pay by 18% and mothballed the new facilities, leaving him and other Irish police, or Gardai, in temporary offices he calls “porta-cabins.”

Mr. Peelo says he’s paying his 30-year mortgage by cutting out vacations, skimping on paid child care for his two young children and working police shifts on Sundays. Adding to the challenge, an old Irish code prohibits him and other police from taking outside jobs.

“We know that there’s an international crisis and that our pay will be affected,” says Mr. Peelo, whose work vehicle has more than 180,000 miles on it. “But there has to be some sense in it.”

The hard choices forced upon Ireland are confronting governments around the world. The U.S. and Britain have huge budget deficits that are potent political issues. Cash-strapped cities and states in the U.S. are slashing services. The pressures are acute in the smaller members of the 16-nation euro zone, where fears of a debt default by Greece have shaken the Continent.

Late last year, Ireland looked a lot like Greece. The financial crisis coincided with a housing bust that left Ireland’s banks in terrible shape, requiring a government rescue. Ireland’s fiscal deficit rose to almost 12% of gross domestic product—a shade under Greece’s 12.7%.

But unlike Greece—where protests and strikes are expected to escalate this week after the government unveiled new spending cuts and tax increases after months of foot-dragging—Ireland took swift measures to snuff out fears of a default.

Irish teachers and police have had their gross salaries slashed by as much as 15%, with new across-the-board taxes taking an additional cut. Dublin also reduced welfare benefits, helping to turn the once-booming Celtic Tiger into the austerity leader in Europe. The European Union is now pressing Greece to do the same—and Portugal, Spain and Italy may not be far behind.

Ireland’s efforts are paying off in one respect: The country’s financial picture has improved in comparison with other troubled countries in the euro zone. In November, the cost to insure against a debt default in Greece and Ireland was the same. Since then, the cost to insure against an Irish default has fallen 20% while Greek insurance has roughly doubled. The difference is also apparent in debt-financing costs: Last week, Athens was forced to offer investors in its new 10-year bond a 6.3% yield, more than 1.5 percentage points above Ireland’s cost last month for similar bonds.

“I think Ireland will bounce back quicker than people think,” says Scott MacDonald, head of research at Stamford, Conn.-based investment fund Aladdin Capital Management LLC, which oversees some $12 billion. “They’re doing the right things.”

But doing the right things has made life more difficult for Ireland’s 4.5 million citizens, particularly for the country’s once-insulated public servants. Salary cuts are already raising the ire of government workers and could risk increased strikes. Thus far, despite widespread grumbling and some work stoppages, the ruling Fianna Fail party has pushed through aggressive changes.

The belt-tightening isn’t expected to ease soon. Lower salaries mean the Irish have less money in their pockets, potentially damping consumer spending, which fuels about 50% of the economy. Ireland’s central bank sees gross domestic product shrinking 1% this year despite having edged into positive territory in the third quarter of last year.

Eva RocaPaul Murphy, principal of St. Oliver’s school in Clonmel, says his salary is back where it was three years ago.

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“While on an international level Ireland is perceived as being proactive, the reality on the ground is that people are suffering,” says Paul Murphy, a 46-year-old principal at St. Oliver’s, a Catholic school in Clonmel, 100 miles south of Dublin.

A spokesman for Ireland’s Department of Finance said public servants have made a “substantial contribution” to the reduction in public spending and that the government realizes the cutbacks are hard. “But they are a matter of necessity in these difficult economic and financial times,” he said.

Voters have grown disenchanted. Fianna Fail, led by Prime Minister Brian Cowen, polls in the mid-to-high 20 percentage point range—the lowest poll ratings for the biggest political party since the 1920s, according to the Economic and Social Research Institute, a Dublin-based think tank. The opposition Fine Gael polls only slightly better.

So far, Mr. Cowen and finance chief Brian Lenihan have resisted calls to raise corporate taxes, which at 12.5% are among Europe’s lowest. They believe the country’s growth, especially in the high-tech and pharmaceutical sectors, depends on maintaining a business-friendly climate.

Ireland also favors remaining in the euro, which many people believe helped fuel its remarkable growth last decade. Upon joining the euro in 1999, Ireland could suddenly borrow at lower interest rates. That cheap credit—along with Ireland’s effort to cultivate its real-estate market—pushed its economy up an annualized 5.3% a year on average from 2000 to 2005.

But euro membership also makes economic recovery tricky. Ireland can’t devalue its currency—a move that would make its country inns cheaper for tourists and its exports more attractive globally—because the euro is managed by the European Central Bank. It also can’t cut interest rates because those, too, are controlled by the ECB. So Ireland, like many of the euro zone’s weaker economies, will have to boost competitiveness the hard way—by cutting wages at a time when workers are already struggling to pay bills.

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In the middle of that effort are Ireland’s 14,500 Gardai, a combined national police force, intelligence agency and secret service. The Gardai obey a professional code, made into law in 1923, that aims in part to protect officers from bias. It prevents them from, among other things, running bars, owning taxis, carrying weapons on duty or playing in musical bands, union officials say. Three particular restrictions have recently become problematic: Gardai can’t strike, hold second jobs to pay the bills or default on their debts, lest they risk losing their jobs.

When Ireland boomed, such restrictions made the Gardai especially credit-worthy borrowers, prompting lenders to encourage police to take on debt, officers say. Now, many are suffering from the hangover of their borrowing binges without the ability to pay their bills by moonlighting.

Several Gardai contacted for this article said they were in such a position. About four years ago, officer Peter Egan, now 30 years old, moved out of his parents’ house in Dublin and bought a two-bedroom apartment. As Ireland’s property bubble burst, he borrowed more cash to buy and renovate a larger, run-down house, hoping to sell the apartment to offset some of the house’s cost.

The market dived, and now Mr. Egan has more than €550,000 (about $750,000) in total mortgage debt, about €100,000 more than he’s been told he could get now for the two properties, if he could find a buyer. The pay cuts now add to the pressure.

“I saw an opportunity to step up the ladder,” says Mr. Egan, stationed in Tallaght, a busy station in Dublin. “But in the meantime, a bomb went off and the economy went crashing. I’m lucky I don’t have a family, because, to be honest, I wouldn’t be able to provide for them.”

Neil Ward, editor of Garda Review, a police-force magazine, said that while some people consider the code draconian, he knows of no plans to change it. But he added: “We fear [the enforcement of the clause against default] in the current climate where, for the first time in Ireland’s history, Gardai have been afforded loans that are now beyond their means.”

In 2007, at the height of the boom, the Gardai drew up plans to build Ireland’s biggest police station, on Dublin’s Kevin Street. In preparation, the Irish government bought the site for €40 million and sold other stations. Now, at a time when burglary rates are up 9% countrywide, the plans are suspended: The site, which rests on old Viking ruins, has been padlocked, its partially dug grounds puddled with rain.

Ireland’s problems are likely not as deep or entrenched as Greece’s. Ireland’s young population—35.7 years old, on average, to Greece’s 42 years—may help the recovery since there are fewer aging pensioners requiring public support. Migrants from Poland and other countries are leaving, too, which could take pressure off unemployment, currently 12.6%, higher than the euro zone’s 9.9% average.

While Ireland’s cutbacks hit public-sector workers hard, the broader recession has arguably been tougher on private-sector workers, who account for more than 80% of the work force. According to Ireland’s Central Statistics Office, the number of employed private-sector workers has dropped by roughly 15% since September 2007. The number of public-sector workers with jobs, by contrast, rose about 5% over the same period.

Debate over the extent to which the public sector should shoulder the burden of the cuts has occupied Ireland’s radio waves and roiled dinner tables for months. Many private-sector workers have little sympathy for police officers, teachers and nurses, who receive guaranteed benefits.

“Everybody needs to get real,” says Stephen O’Regan, a 26-year-old Internet entrepreneur, referring to some public-sector workers who have threatened work actions. “They’re going on strike, because they aren’t getting the salary increases they wanted?”

The Irish government says its measures have been fair. Last spring, the government raised special levies on personal income that affected all Irish. Then, in December, officials slashed 5% of civil servants’ first €30,000 of income and 7.5% of any pay between €30,000 and €70,000. The next €55,000 saw a 10% cut. Because Ireland is also facing the possibility of a prolonged fall in prices—deflation—the cuts are considered a bit more manageable.

John Monaghan, a professor at Trinity College Dublin and national vice president of charity organization Society of St. Vincent de Paul, says the government’s decision to cut €760 million from social-welfare programs could have bitter consequences. “People are really angry,” Mr. Monaghan says. “And they’re being told that it’s necessary to get the economy going.”

Public-sector worker Michelle Kavanagh isn’t sure where the spark will come from. Ms. Kavanagh, 26, has worked for more than six years for the Department of Justice, in a clerical job long considered stable. Now, she has seen her annual after-tax pay fall to €20,000 from more than €25,000.

Ms. Kavanagh says she has high child-care costs and borrows from her mother to take her 7-year-old daughter, Aoibhean, to the doctor, where routine visits can top €50. She also helps care for her longtime boyfriend’s three kids. To make ends meet, she often works 70 hours a week, getting to Justice at 8:30 a.m., returning home to cook dinner at 6, and then heading to a second job at a nearby club, often finishing at 2 a.m.

She says she’s making less money there than she used to, as is her boyfriend. Last Christmas, a holiday tip jar amounted to €30 each for the bar’s eight staff. In 2008, the bar’s 12 employees got €250 each. “If they bring another pay cut, I don’t know what I’ll do,” she says. “I can’t work any more hours.”

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