Ireland exits bailout

Ireland has endured a torrid few years since the onset of the financial crisis, but it took a major step toward stability today.

The government confirmed that it would exit the EU/IMF bailout on Sunday, making it the first peripheral country to emerge from an international rescue package. What's more, it is making this important move without the safety net of a precautionary credit line from the European Stability Mechanism (ESM). This appears to make it ineligible for help from the ECB's Outright Monetary Transactions (OMT) programme, though the legality on this issue is unclear.

Ireland's government is confident that it can raise the necessary funds in the capital markets, and the sovereign's CDS spreads suggest their confidence is justified. Ireland now trades at 121bps, its tightest level since March 2010 and a far cry from the 1,177bps reached in July 2011.

Its supporters in the EU's corridors of power would no doubt point to the government's commitment to austerity policies and the Irish people's stoicism in accepting tax rises and spending cuts. There may be some truth to this view, but the real driver of the rally in Irish spreads - and across the periphery as a whole - was the introduction of the ECB's OMT programme in September 2012 and the central bank's vow to support the irreversibility of the euro. Without the ECB's intervention, it is likely that we would have seen several bouts of extreme volatility in the interim.

And Ireland has not quite escaped the shackles of the troika (EU, ECB and IMF). It will still be under surveillance by the EU and IMF until 75% of loans are repaid, which will be many years from now, and inspectors will publish two reports every year. The biggest problem it faces next year will be the recapitalisation requirements for the country's beleaguered banks after the ECB's stress tests are conducted. This could force the country's massive debt burden even higher.

Ireland's budget deficit is still worryingly high, and its GNP levels - a more appropriate measure of output than GDP for an open economy such as Ireland - indicate that growth is largely absent. It may be that debt forgiveness in some form may eventually be required if Ireland is get back to a sustainable fiscal footing.

But Ireland is fully funded until 2015, and the reassuring presence of the ECB means that the sovereign should stay out of the firing line next year.

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