Monday, November 22, 2010

Ireland (Plus Mrs. Merkel)

Ireland is about to become the second country in the EU to get a bailout (Greece was first). News and analysis  on the subject can be found everywhere, so I'll just throw in a few charts.

Until recently Irish public debt was quite low, around 30% of GDP.  But when the property and banking bubble burst things changed very fast.  Government liabilities exploded from 60 to 140 billion euro in less than three years (see chart below).

Irish Government Liabilities

The main culprit of Ireland's demotion from prince to pauper is its failed banking system. Ireland boasts  a GDP per person that is second highest in the EU (in purchasing power parity terms) and yet... why did they go so massively in debt?  The private sector is in debt to the tune of some 350 billion euro (~175% of GDP), with home mortgages alone accounting for 110 billion (see table below - click to enlarge).

Chart: Central Bank of Ireland

Home prices are now slumping across Ireland, but as the chart below shows the bubble was a long time forming.

TSB/ESRI House Price Index

So, what happened in Ireland?  In a word, hubris.  When it entered the European Union in 1973, Ireland was a poor agricultural society - indeed, the poorest country in western Europe.  In a determined effort to bootstrap itself, Ireland focused on education and started attracting foreign (mostly American) manufacturers of high tech equipment and services, offering ultra-low corporate tax rates as an inducement.  It worked marvelously well, turning the country from pauper to prince.

And it all went to their head in the end,  as it always does in the human race.  Dublin became a must-got-to place, a sort of Rome-in-the-Guinness-belt.  Home prices soared and kept on soaring, despite the fact that incomes could not possibly keep up with spiking prices.  Irish home buyers borrowed heavily and in turn their banks borrowed from abroad, particularly from Germany (note the imbalance between debt and domestic deposits in the table above). 

It is estimated that German lenders currently hold about 150-180 billion euro worth of Irish liabilities, making the Irish Problem a very serious one indeed for the German financial system.   And it serves as a poignant counterpoint for Mrs. Merkel, the German Chancellor who has made so much political hay at home at the expense Greece, even though German banks hold only some 30-40 billion of Greek bonds.

P.S. A final prediction, for what predictions are worth: Europe is going to go the way of the US in bailing out its economy (-ies) and Mrs. Merkel is not going to make it past April 1, 2011 as Germany's Chancellor.


  1. At last a great and neutral post on Ireland.

    Documented with figures, not feelings (fear, compassion, joy of their British "friends"...) and other manipulative twists.

    This is certainly not the big test for the Eurozone. I still believe that Greece and Ireland are alas learning experiences. Specifically in terms of monetization. Any alternative is now out of touch.

    Spain will be a much tougher challenge. In due time.


  2. Yes, it's all about Spain isn't it. If the bad debt virus ever makes Spain seriously sick it's all over.

    The combined GDP of P+I+G = ~600 billion euro or 4.5% of total EU GDP.

    Spain by itself comes to 1.2 trillion euro. If we look at the eurozone alone, Spain accounts for 13-14% of its GDP.

    It's the Biggie Gulp..

  3. Greetings from a next-to-bail national!

    Or should I have said: Indirect bail outs of banks at the EU core via austerity at my homeland (partially deserved)?

    Assuming that Frau Merkel goes the way she deserves, I am quite curious on what a SPD+Greens will do in Germany. If it was 30 years ago I would be optimistic, but nowadays? European social democracy is going through a prolonged funeral...

  4. Hi Hell,

    The pen pic is a littlish on the helium - but no matter. We are 'busted'.

    Its our political and commercial elites who caused the problem. We got thru the 1970s oil crisis and inflation. Had a bad downturn in the 1980s into the 1990s - when things started to get out of hand (reckless fiscal policies) and after 2002, 'free' credit for everyone in the audience. The post 2008 downturn has impoverished many middle-class pensioners (put their savings into bank shares!!!). Shouda read SuddenDebt!!

    Our agri sector is sound, and we do not have harsh northern european winters. So we will not run short of food. Can't say the same for our potable water supply though. As for fossil fuels: we import 101% of what we need. This may be our real undoing!

    Brian P

  5. With Frau Merkel gone I think it will become very easy to unleash QE1 upon the EU.

  6. Our agri sector is sound, and we do not have harsh northern european winters. So we will not run short of food.

    Are you sure about that?

    Part of the Danish "Taxpayers Save The Banks"-effort was a law to allow non-farmers to buy farmland; The farmers make DKK 4000 Million per year and have a debt of about DKK 360000 Million .... when they go bust, which they will, the banks will be off the hook at the price of Chinese, Russians or Saudis owning the land and the food grown on it.

    The same template is being applied everywhere!

    Ireland has previous experience with foreigners controlling their food production!

  7. The Finnish minister of finance demanded publicly some clear collateral for the emergency loan to Ireland, but then just told us that "it's impossible to demand guarantees".

    Why is it impossible? If a nation is about to go under they certainly can and should provide clear guarantees for any emergency loan they receive. Put your parliament house as a collateral, why is it "impossible" to do it? Inconvinient certainly, but hardly impossible.

    Doing that would mean they are serious about paying it back, that they really really need it and make the debtor nation citizens feel safe about giving the loan.

    Why is that impossible? Gee, could it be that the money is about to vanish into black hole created by greedy private bankers.

    Mr. Katainen of Finland as well as all other financial ministers in EU should be ashamed of themselves. This is blatant lying about really big things and it will not end smoothly.

  8. The reference to Ireland having the 2nd highest GDP per capita in the EU needs to be qualified - as it stands, the impression you give is rather misleading.

    Ireland is the only country I know where domestic media coverage of the economy focuses on GNP rather than GDP. Since the late 90s, GDP has run around 20% higher than GNP. This is unusual - and reflects the ultra-low tax rates you mention. The extra GDP is basically repatriated profits from multinationals based in Ireland for tax purposes. So GNP per capita is more likely to reflect the economic experience of Irish people beyond the boundaries of the International Financial Services Centre.

    But hubris is certainly the word - an absurd, superhumanly surreal kind of hubris which has covered large parts of the country with estates full of empty houses for which demand could never have existed. When I toured Ireland with Vinay Gupta a couple of months ago, he took to complimenting our hosts on the achievement of having "a million extra bedrooms" in a country of 4 million people. At the current rate of migration, that figure can only go up.