The Irish patient
21/11/10 15:38![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
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talkpoliticsJust a year ago, the common joke was that the only difference between Iceland and Ireland is just one letter plus a few months' time. But while the joke used to cause only sour smiles in Dublin at the time, now its the people in Reykjavík that could be the ones frowning at a comparison with the Emerald Island. Because what appeared like a mighty Celtic tiger, now looks more like a frightened kitten lying helplessly in the E.R. of the Eurozone. And its just a matter of time for it to agree to be put on life support by the EU, the European Central Bank and the IMF.
This time the events developed rather quickly, especially compared to the prolonged Greek drama which took months to unfold, and where the EU was eventually compelled to pay a very steep price for their long inaction. Besides, the roles seem to be reversed this time around. While Athens was begging Brussels to save her, now the European leaders themselves are almost forcefully pushing aid in Dublin's direction. And they may seem more concerned about the fate of the rotten Irish banks than the Irish PM Brian Cowen himself. And there's of course a good reason for that - its not just Ireland's fate thats hanging in the balance, its the stability of the entire Eurozone, especially that of its weakest links, Portugal and Spain. No one wants the feared domino effect happening. And this all makes the sort of poker game Dublin and Brussels are playing the weirder.
Still, while the Irish finance minister Brian Lenihan kept on denying that his country needed urgent help from EU, IMF or anyone else, a mission of experts departed from Brussels and arrived in Dublin on Thursday, aiming at "short, focused consultations for the best way of avoiding market risks" (thats the coded PC term for "The shit has hit the fan, help, help, heeelp!"). So, after almost a fortnight of increased tension around the international stocks and across Brussel's corridors, Mission Saving-of-Ireland now looks imminent. Whether the EU and IMF financial injection would bring an ultimate solution to Ireland's problems, or it'd only aggravate them, is another question.
Ireland being overhead and ears into debt is no news, though. And, while its mainly the Irish themselves that are responsible for standing at the brink of a debt crisis, pushing them toward the edge of the abyss didnt happen without some help from "friends". The reason things went out of control so fast was to a large extent Berlin's initiative at the EU meeting in October, where they proposed creating a mechanism for state default in the Eurozone that was to start from 2013. This practically opened the way to restructuring the debts and defaults of entire states. Up till now, some investors wanted to believe that, although after all, state defaults would eventually occur, the EU's official policy would still be to try avoiding them (or at least deny everything). The decision taken on that meeting was like dropping a bomb, because things changed from outright denial directly to acknowledgement that state defaults were actually an option.
And that of course drastically increased the overall feeling of risk when dealing with state bonds emitted by the biggest debtors in the zone. In result, the profit from the Irish bonds surged to the record 8.8%. But the thing is that the rising interest rates only aggravate the problem and make it even harder for Ireland to serve its debts. In turn, this further increases the investors' fear of state default and thus the vicious circle is closed. In practice, the EU's statements from the last months have opened the door wide for financial speculations.
The main target was of course Ireland, as one of the weakest links in the Eurozone. Its hard to believe that 9 years ago The Newsweek would write that "Prosperity has finally arrived in the land of Joyce and Yates, and created a country that no-one had ever imagined could possibly exist - wealthy and happy". And now, while most others have a recession, Ireland is having a full-fledged depression!
Ireland's remarkably fast progress was followed by a sharp and equally remarkable crash. While between 1990 and 2007 the economy was sprinting with an average 6.5% annual growth, for the last 4 years it has been stuck in what the IMF dubs the deepest recession any developed country has seen, post-war. The former EU superstar and exemplary model is now being compared to Greece. The former poor backyard of Europe, which then suddenly outran everyone save Luxembourg in terms of wealth per capita, at the moment is struggling with a two-digit unemployment, and is seeking their famed Irish luck abroad (the net migration is now negative for the first time in many years).
But how did it all begin for Ireland? The bursting of the property balloon was first, and it was a bigger burst than the US one. In the decade preceding 2006 the value of properties jumped 4-fold, and construction industry swelled to a sheer 1/8 of the country's economy. The price of an average Dublin house catapulted 5-fold... and then contracted in half. As Phillippe Legrain says in his Aftershock: Reshaping the World Economy After the Crisis, such a property bust couldnt go painlessly; but on the other hand its not necessary that it automatically leads to a public debt crisis. But unfortunately, thats exactly what happened in Ireland's case. And to a large extent, the blame is on the Irish government itself.
The collapse of the estates market brought the Irish banks to their knees, as they had been giving out credits to construction entrepreneurs and mortgages to customers with a stunning generosity that rendered the industry completely unsustainable. And then Brian Cowen's government did something which many analysts now, post-factum, define as the most fatal mistake: they promised to give full guarantees not only for all deposits, but for all bank bonds as well (a decision which he keeps defending to this very day).
This way actually an equality sign was put between the debts of the financial institutions on one side - and public debt on the other. In result, saving the banks would cost the angry (and rightfully so) taxpayers at least 50 bn euros. The effect on the state finances is also catastrophic - the injections into the ill sector will skyrocket the budget deficit to the astronomic 32%, and the public debt which in 2007 was just 25% of the GDP, is now 82.9%. And the fears are that the worst is still ahead. Morgan Kelly, an economist from the University College of Dublin, recently forecast in The Irish Times that the country is threatened of another wave of crashes. But this time the catalyst won't be the already exposed bad credits, this time it'll be caused by the dangerously increasing number of home mortgage expirations.
Practically, the Irish banks, now cut from any access to their traditional channels for recruiting capital, are standing in front of imminent bankruptcy. And the only reason they keep on going is the life supporting credit line from the European Central Bank which is providing the finance that the market denies them. But that couldnt last very long. Toward the end of October the Irish banks have amounted a total 130 bn euro of debts to the ECB, which is actually nearly 1/4 of the total liquidity provided by the ECB, and its roughly the size of the entire GDP of the former Celtic "tiger".
And yet, all of this might be painful, but its not necessarily fatal. Apart from the purely emotional reasons for refusing EU and IMF help (the sense of humiliation and the loss of prestige), Ireland's government also has other reasons that are more rational. For instance, its not like its directly threatened of immediate bankruptcy. In fact they have enough resources to cover all their financial needs at least until mid 2011. Another argument against aid is the concern that financial aid could come along with a set of unacceptable demands for concessions, like raising the corporate tax from its current low level of 12.5%, which has been a thorn in Germany and France's ass for ages. There's also a political moment. Its just that the government refuses to admit that its weak, although everyone knows that already.
But the bigger risk is that, in fact, this aid, be it desired or not (but almost certain to come), could ultimately do a bad favour to Dublin. From a POV of the Irish economy it doesnt look like real help, because it'd create additional debt burden. In a sense its a medicine which would make the illness incurable and would make the situation worse. It looks logical that the idea of fighting debt with more debt isnt the wisest one (let alone it being the most convenient tool for bringing entire countries to their knees). Plus, even if some money is funneled into the financial system, it still doesnt solve the problems of the banks. Many of them are hollow, zombie-banks which have to go eventually, one way or the other. Its not money that they need, its restructuring.
The good news is that despite the similarities, Ireland is not Greece, and neither is it Portugal or Spain. I mean, despite the fiscal swamp they're in, the Irish economy still keeps being competitive. I know its hard to believe, but the data shows that the export is still alive and well. And foreign investment keeps being vibrant. Probably with a bit of their famous Irish luck, the more optimistic scenario could unfold, and the country would pull itself from the debt hole through sheer growth. And that'd be an example of Baron Munchausen dragging himself out of the marsh by his own hair, but on a large scale.
This time the events developed rather quickly, especially compared to the prolonged Greek drama which took months to unfold, and where the EU was eventually compelled to pay a very steep price for their long inaction. Besides, the roles seem to be reversed this time around. While Athens was begging Brussels to save her, now the European leaders themselves are almost forcefully pushing aid in Dublin's direction. And they may seem more concerned about the fate of the rotten Irish banks than the Irish PM Brian Cowen himself. And there's of course a good reason for that - its not just Ireland's fate thats hanging in the balance, its the stability of the entire Eurozone, especially that of its weakest links, Portugal and Spain. No one wants the feared domino effect happening. And this all makes the sort of poker game Dublin and Brussels are playing the weirder.
Still, while the Irish finance minister Brian Lenihan kept on denying that his country needed urgent help from EU, IMF or anyone else, a mission of experts departed from Brussels and arrived in Dublin on Thursday, aiming at "short, focused consultations for the best way of avoiding market risks" (thats the coded PC term for "The shit has hit the fan, help, help, heeelp!"). So, after almost a fortnight of increased tension around the international stocks and across Brussel's corridors, Mission Saving-of-Ireland now looks imminent. Whether the EU and IMF financial injection would bring an ultimate solution to Ireland's problems, or it'd only aggravate them, is another question.
Ireland being overhead and ears into debt is no news, though. And, while its mainly the Irish themselves that are responsible for standing at the brink of a debt crisis, pushing them toward the edge of the abyss didnt happen without some help from "friends". The reason things went out of control so fast was to a large extent Berlin's initiative at the EU meeting in October, where they proposed creating a mechanism for state default in the Eurozone that was to start from 2013. This practically opened the way to restructuring the debts and defaults of entire states. Up till now, some investors wanted to believe that, although after all, state defaults would eventually occur, the EU's official policy would still be to try avoiding them (or at least deny everything). The decision taken on that meeting was like dropping a bomb, because things changed from outright denial directly to acknowledgement that state defaults were actually an option.
And that of course drastically increased the overall feeling of risk when dealing with state bonds emitted by the biggest debtors in the zone. In result, the profit from the Irish bonds surged to the record 8.8%. But the thing is that the rising interest rates only aggravate the problem and make it even harder for Ireland to serve its debts. In turn, this further increases the investors' fear of state default and thus the vicious circle is closed. In practice, the EU's statements from the last months have opened the door wide for financial speculations.
The main target was of course Ireland, as one of the weakest links in the Eurozone. Its hard to believe that 9 years ago The Newsweek would write that "Prosperity has finally arrived in the land of Joyce and Yates, and created a country that no-one had ever imagined could possibly exist - wealthy and happy". And now, while most others have a recession, Ireland is having a full-fledged depression!
Ireland's remarkably fast progress was followed by a sharp and equally remarkable crash. While between 1990 and 2007 the economy was sprinting with an average 6.5% annual growth, for the last 4 years it has been stuck in what the IMF dubs the deepest recession any developed country has seen, post-war. The former EU superstar and exemplary model is now being compared to Greece. The former poor backyard of Europe, which then suddenly outran everyone save Luxembourg in terms of wealth per capita, at the moment is struggling with a two-digit unemployment, and is seeking their famed Irish luck abroad (the net migration is now negative for the first time in many years).
But how did it all begin for Ireland? The bursting of the property balloon was first, and it was a bigger burst than the US one. In the decade preceding 2006 the value of properties jumped 4-fold, and construction industry swelled to a sheer 1/8 of the country's economy. The price of an average Dublin house catapulted 5-fold... and then contracted in half. As Phillippe Legrain says in his Aftershock: Reshaping the World Economy After the Crisis, such a property bust couldnt go painlessly; but on the other hand its not necessary that it automatically leads to a public debt crisis. But unfortunately, thats exactly what happened in Ireland's case. And to a large extent, the blame is on the Irish government itself.
The collapse of the estates market brought the Irish banks to their knees, as they had been giving out credits to construction entrepreneurs and mortgages to customers with a stunning generosity that rendered the industry completely unsustainable. And then Brian Cowen's government did something which many analysts now, post-factum, define as the most fatal mistake: they promised to give full guarantees not only for all deposits, but for all bank bonds as well (a decision which he keeps defending to this very day).
This way actually an equality sign was put between the debts of the financial institutions on one side - and public debt on the other. In result, saving the banks would cost the angry (and rightfully so) taxpayers at least 50 bn euros. The effect on the state finances is also catastrophic - the injections into the ill sector will skyrocket the budget deficit to the astronomic 32%, and the public debt which in 2007 was just 25% of the GDP, is now 82.9%. And the fears are that the worst is still ahead. Morgan Kelly, an economist from the University College of Dublin, recently forecast in The Irish Times that the country is threatened of another wave of crashes. But this time the catalyst won't be the already exposed bad credits, this time it'll be caused by the dangerously increasing number of home mortgage expirations.
Practically, the Irish banks, now cut from any access to their traditional channels for recruiting capital, are standing in front of imminent bankruptcy. And the only reason they keep on going is the life supporting credit line from the European Central Bank which is providing the finance that the market denies them. But that couldnt last very long. Toward the end of October the Irish banks have amounted a total 130 bn euro of debts to the ECB, which is actually nearly 1/4 of the total liquidity provided by the ECB, and its roughly the size of the entire GDP of the former Celtic "tiger".
And yet, all of this might be painful, but its not necessarily fatal. Apart from the purely emotional reasons for refusing EU and IMF help (the sense of humiliation and the loss of prestige), Ireland's government also has other reasons that are more rational. For instance, its not like its directly threatened of immediate bankruptcy. In fact they have enough resources to cover all their financial needs at least until mid 2011. Another argument against aid is the concern that financial aid could come along with a set of unacceptable demands for concessions, like raising the corporate tax from its current low level of 12.5%, which has been a thorn in Germany and France's ass for ages. There's also a political moment. Its just that the government refuses to admit that its weak, although everyone knows that already.
But the bigger risk is that, in fact, this aid, be it desired or not (but almost certain to come), could ultimately do a bad favour to Dublin. From a POV of the Irish economy it doesnt look like real help, because it'd create additional debt burden. In a sense its a medicine which would make the illness incurable and would make the situation worse. It looks logical that the idea of fighting debt with more debt isnt the wisest one (let alone it being the most convenient tool for bringing entire countries to their knees). Plus, even if some money is funneled into the financial system, it still doesnt solve the problems of the banks. Many of them are hollow, zombie-banks which have to go eventually, one way or the other. Its not money that they need, its restructuring.
The good news is that despite the similarities, Ireland is not Greece, and neither is it Portugal or Spain. I mean, despite the fiscal swamp they're in, the Irish economy still keeps being competitive. I know its hard to believe, but the data shows that the export is still alive and well. And foreign investment keeps being vibrant. Probably with a bit of their famous Irish luck, the more optimistic scenario could unfold, and the country would pull itself from the debt hole through sheer growth. And that'd be an example of Baron Munchausen dragging himself out of the marsh by his own hair, but on a large scale.
(no subject)
Date: 21/11/10 13:47 (UTC)(no subject)
Date: 21/11/10 14:35 (UTC)(no subject)
Date: 21/11/10 19:21 (UTC)(no subject)
Date: 21/11/10 19:29 (UTC)Awesome: causing awe.
Shock'n'awe.
= evil.
:)
(no subject)
Date: 21/11/10 19:46 (UTC)(no subject)
Date: 21/11/10 20:08 (UTC)(no subject)
Date: 21/11/10 15:12 (UTC)I like the fact that the IE politicians are still in denial. Maybe they can revert the country to being a backwater UK-client-state and pretend that there's no need for fast economic growth.
(no subject)
Date: 21/11/10 15:33 (UTC)The downside of excessive dependency on foreign investment is that it makes you too vulnerable to factors beyond your reach. So as soon as the shit hit the fan, Ireland was in trouble.
It has been said that no crisis should go to waste. The upside of the Irish trouble is that the Irish are suddenly rediscovering their "love" for Europe. They caused a lot of pain to EU with their "No" vote on the referendum, now I doubt they'll have any objections. Ironically, they've been reaping the fruits of their integration while providing little in response, but if they weren't in the euro zone their national currency would've crushed down by now. And then the comparison to Iceland would've been spot on. Note that even the bishop of Dublin, can't remember his name, called for the people to look at the bright side of the EU membership, reminding of the famine times which wasn't so long ago. So in a way the decline of the Irish economy is a chance for serious EU reform.
Also, amazingly well structured post again. You should write for the F.T.
(no subject)
Date: 21/11/10 15:58 (UTC)recommendedimposed on them. Its like a kid who has had too much candy, wants more, but is beginning to find out that his dad telling him more candy would make him sick is actually correct, and his dad is doing all this both for the kid's own good and his own. Now, whether the EU has the best solutions is another question, but at least the first step should be made, namely, acknowledging that something must be done instead of sitting with your head in the sand.Writing for FT? Come on, i'm too lazy to put all the punctuation... and i tend to eat most of the apostrophes :D
(no subject)
Date: 21/11/10 17:11 (UTC)There are editors for that.
(no subject)
Date: 22/11/10 14:27 (UTC)Yeah, looks like something was done, they crawled with cap in hand to England! and got all paid for them.
This isn't free market ecconomics, this is some already very rich bankers getting richer.
I'll guess though, we need to keep ireland afloat, who else can we turn to in 2 years time when we need more ships than we can build to keep the rest of the world at war to ensure another bunch of rich people don't end up driving commoners cars?
(no subject)
Date: 21/11/10 16:43 (UTC)What is it with people and their inability to learn from history? Zombie banks, as their name suggests, just keep shambling along eating taxpayer brains year after year.
Let them go under, suffer the short-term pain and put it behind you. Ireland won't be competitive for long if it has to carry bad debt for years and years.
(no subject)
Date: 21/11/10 16:47 (UTC)It's
greedthe free market, dear. Let me take this cash, thank you. Nothing bad can happen to me, ever. The bad only happens to others, right? So gimme the cash, please sign here and here, the market will regulate the rest. Ktxbye.(no subject)
Date: 21/11/10 17:05 (UTC)(no subject)
Date: 21/11/10 17:04 (UTC)Let them go under, suffer the short-term pain and put it behind you, yes? Surely, that'd make America uncompetitive for long but America should've known better in the first place, right? There's always someone ready to take their place, like, say, China perhaps.
(no subject)
Date: 21/11/10 17:08 (UTC)Rhetorical question is rhetorical.
(no subject)
Date: 21/11/10 17:13 (UTC)(no subject)
Date: 21/11/10 17:07 (UTC)(no subject)
Date: 21/11/10 17:07 (UTC)(no subject)
Date: 21/11/10 18:48 (UTC)Then why not even Italy? It remains unnoticed mostly because it averted the accumulation of large budget deficit, at least compared to its neighbors. But Italy still has a large debt inherited from a past of rampant spending, and its economy is in a disastrous state ever since it joined the Euro zone.
What about France? Indeed its economy is much stronger compared to many countries especially in the periphery. But still the recent protests against a relatively modest pension reform show clearly that no other country sticks so stubbornly to its outdated and unsustainable social system like France does. Even the Greeks have shown a desire for change in this direction. It's naive to expect that France would always remain on a pedestal.
Portugal has many structural disadvantages. It also needs a rescue plan.
In Greece the main problem was the lack of financial discipline. In Spain it's the bust of the property balloon that was artificially inflated through excessive crediting. In Ireland the latter is coupled with an excessively large banking sector. Every country has different factors that trigger the crisis but the main root reason is common for all of them. Adopting the Euro was a huge risk that they all took with the hope that sharing a common currency would help a group of very diverse economies to integrate. It allowed the central bank to direct a unified policy on all their behalf. Turns out that project was curious but inherently flawed. Or at least its implementation went wrong from the start. These economies are too different to allow a central bank to "rule them all". The interest rates are always at the wrong levels in each of these countries. The only variable is the apparent manifestation of these differences. In Greece it was the fiscal crisis. In Germany the huge trade excess. In Spain the construction balloon which went kaboom. But like a stream of water that looks for its way to the sea, all the problems eventually find the way down and out and then all dams go kaput.
This crisis will continue to flow from one country to another, like the cholera in Haiti. The only possible solution now seems to be dividing the huge Euro zone into smaller currency zones that are easier to manage and whose constituents do share common features. Unless the leaders of these countries realize this simple notion, any rescue effort will be only shifting the battlefield from one place to another and will be dealing with the symptoms and not with the root cause.
(no subject)
Date: 22/11/10 09:59 (UTC)http://www.lexpansion.com/economie/le-dr-catastrophe-s-attaque-a-la-france_242924.html
(no subject)
Date: 22/11/10 12:22 (UTC)Well let the Foreign investors pick up the tab, sounds to me like Begging letters have been sent to England already, for moneys we were told just recently we don't have for our own problems.
Ireland is Europes problem now, let them deal with the errant child.
Radio 2 suggests their debt is £18,000 per head, We have our own problems and they have after all fought for their independence for years, what should we do? Pay their debt then cut the apron strings?
Can't we just send the bailiffs in?