Ireland remains the “most successful” of the euro zone periphery countries in its efforts to overcome crisis in the banks and public finances, said credit rating agency Fitch.
In a report which also examined the situation in Spain, Portugal and Italy, Fitch said Ireland was an “outlier” by most recovery metrics, even though the State suffered the biggest economic contraction in the crash.
“The recovery, and ultimately the growth potential, was helped by high openness of the Irish economy, confidence in the financial sector was boosted by early bank recapitalisation, though forbearance of [non-performing-loans] prevailed for a longer period and fiscal consolidation has continued during the recovery,” Fitch said.
The firm noted that recovery in Ireland and Spain accelerated in 2015, outperforming “sluggish” recovery in Portugal and Italy.
“The medium-term growth potential of the Spanish economy has also improved since the crisis, albeit less than in Ireland. It is underpinned by the accelerarating recovery of domestic demand, investment inparticular, strengthening confidence and early resolution of financial sector stress.
“By contrast, the recovey and the medium-term potential have remained weak in Italy and Portugal. Investments are barely growth, forbearnace of \[non-performing-loans] and financial sector weakness prevail, while recent fiscal easing has failed to boost the recover.”
Fitch said Ireland and Portugal were hit hardest by the “adverse sovereign-bank loop” and surging country risk premiums when crisis struck.
However, immediate and significant pro-cyclical fiscal tightening was required in each of the four countries to ensure fiscal sustainability. Due to the build-up of excessive external debt, Ireland as well as Spain and Portugal had to undertake a big current account adjustment or external rebalancing.
Of the peak-to-trough decline in gross domestic product, Fitch said Ireland suffered the largest contraction at 12.3 per cent and said it was “only” 8.4 per cent in Spain.
It went on to note that Ireland, in the first quarter of 2013, and Portugal, in fourth quarter of 2012, reached the trough earlier “as both countries were hit by the crisis in its first stage.” In Italy, by contrast, the trough was not reached until the second quarter of 2014 .
Saying the turnaround in the euro zone was not homengeneous, Fitch said there was divergence in recovery even though recession was similar.
“In Ireland, GDP has increased by almost 20 per cent form the trough, including an exceptionally strong performance in 2015 when annual average growth reached 7.8 per cent.”
