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Viewing cable 08DUBLIN653, THE IRISH ECONOMY -- FEW OPTIONS LEFT

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Reference ID Created Released Classification Origin
08DUBLIN653 2008-12-03 09:27 2011-07-22 00:00 CONFIDENTIAL Embassy Dublin
VZCZCXRO7161
PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHDL #0653/01 3380927
ZNY CCCCC ZZH
P 030927Z DEC 08
FM AMEMBASSY DUBLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 9615
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHBL/AMCONSUL BELFAST PRIORITY 0842
C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000653 
 
SIPDIS 
 
STATE PASS TO TREASURY FOR ATUKORALA 
 
E.O. 12958: DECL: 12/02/2018 
TAGS: EFIN ECON ETRD PREL EI
SUBJECT: THE IRISH ECONOMY -- FEW OPTIONS LEFT 
 
REF: A. DUBLIN 573 
     B. DUBLIN 571 
     C. DUBLIN 545 
     D. DUBLIN 508 
 
DUBLIN 00000653  001.2 OF 002 
 
 
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 
 
DUBLIN 00000653  002.2 OF 002 
 
 
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. 
 
Comment 
------- 
 
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. 
FOLEY