Minister for Finance Brian Lenihan has attempted to calm fears about the recent surge in the cost of Irish borrowing, saying there had been a remarkable turnaround in the Irish economy over the past year.
He told a conference on the media in Dublin that while the most recent official figures were weaker than expected, they showed that the economy had stabilised and it was important that the full picture and the underlying trends were reported.
"Exports are growing. New order books are expanding and business confidence has improved markedly since last year. Tax revenues are stabilising, public expenditure is under control and our budget deficit will shrink next year," he said.
He warned, however, that neither the international markets nor our European Union partners would tolerate a slippage from the stated budget targets.
The Government has agreed with the European Commission that it will cut the budget deficit to 3 per cent of gross domestic product by 2013 from 14 per cent last year.
The Minister also said that he was concerned by the yields demanded by investors during the most recent sale of Irish Government bonds, adding that it was too early to signal whether a tougher budget was now required for next year.
Earlier this week the National Treasury Management Agency – which manages the State's debt – raised €1.5 billion in a bond auction, but was forced to offer one percentage point more in yield than during a similar auction a month earlier.
Mr Lenihan said the national accounts, published on Thursday, showed that the economy bottomed out last year in the fourth quarter. So far this year there had been significant growth in first-quarter output and a smaller decline in the second quarter.
"On gross national product, we have moved from a very steep decline, a fall of 11 per cent, to a position of stabilisation. This is a remarkable turnaround and it is important that we bring it to the attention of potential investors," he said.
Mr Lenihan said he recognised and understood the anger felt by the public about what had happened over the last three years.
"That anger has been well articulated by commentators who genuinely and rightly believe they have a role in giving voice to the frustrations of the citizens. But those of us in positions of leadership have a duty to give people hope," he added.
The Minister said the recent surge in borrowing costs for some countries suggested there was a concerted attack on euro zone nations.
He said the Irish Government "will do everything that is essential to protect the common currency and put our own economic house in order".
Irish borrowing costs hit a new high of 6.546 per cent yesterday and have been rising for the last month. The extra yield investors demand to hold Irish bonds over German bonds has surged to record highs due to investor concern about the State's ability to manage its budget deficit and the bank bailout.
Former EU commissioner and attorney general Peter Sutherland, now a non-executive chairman of Goldman Sachs International, said the Government may need to cut more than €3 billion in next year's budget.
"The figure of €3 billion has been postulated as the improvement to be sought in the next budget," Mr Sutherland said in a speech in Dublin yesterday.
"We are told that this is all that the political system can bear, but if all the mainstream political parties accept that more is required and are prepared to say it, we can find a way." One bright spot for the Government came from a research note by Goldman Sachs Group, which said Ireland was "very unlikely" to experience a financial crisis as severe as the one that forced Greece to seek an international bailout earlier this year.
"A repeat of the Greek debt turmoil in Ireland is very unlikely," Michael Vaknin, a senior fixed-income strategist at Goldman in London, said.
"With Irish spreads already at all-time highs, we would argue that refinancing risks in the Irish debt market are aggressively priced-in already," he added.
