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“If you ever go across the seas to Ireland…”

Irish economy | “If you ever go across the seas to Ireland…” Anthony Harrington

To twist the words of the old song, if you ever go across the seas to Ireland, you are unlikely to find the population in a very forgiving mood, at least as far as the government of the day is concerned. There is a real anger out and about in Ireland at the way the Celtic tiger has been brought down by foolish bank lending and equally foolish and unsustainable government promises to stand behind that lending.

On Monday November 22 a deal was finally done and Ireland secured a bailout worth up to 90 billion euros from the EU, the European Central Bank and the IMF. It was still unclear at the time of going to press whether Ireland had bowed to German and French pressure to do something about its ultra low corporate tax rate as a quid pro quo for the deal. Ireland had been saying “absolutely not”, which was clearly the right thing for them to say, since raising the rate would not bring in that much revenue and would certainly kill off one of the few remaining avenues for growth for the Irish economy. Why else would Google, for example, have located to Ireland if not for the low rates? German and French politicians have called the rates “almost predatory”, but forcing Ireland to give them up as part of the deal would have simply been nasty – not in the spirit of EU cooperation at all.

But back to the bailout. It has always had an inevitable look about it. Everyone knew, or should have known, that the Irish banks were in hock to bad property loans worth several times the GDP of Ireland, so it was never clear how exactly the Government intended to make good the bad debts of its banking sector.

At best the Irish decision at the start of the crash to guarantee Irish bank debt was (possibly) a noble bluff, designed to calm market fears. But the market fears were not irrational. They were oh so rational. The loans were terrible and the multiples were horrendous. In China they’d probably have shot the bankers and closed the banks. The UK would probably have given them a golden pension and let them quietly slink away. Ireland decided to plump for a bout of ascetic austerity and to hope for the best on a “business as usual” basis. The best did not happen and “usual” got redefined downwards.

As one fund manager remarked to me before the IMF, the EU and the Irish Prime Minister went into their huddle over a bailout loan, “once the markets spot a fault line, they just keep banging away until it breaks.” The big unanswered question, of course, is what, exactly is it that is going to tip over when the fault line does give way? Ireland? The European peripheral nations? The euro?

And what, exactly, are the Germans playing at? Angela Merkel has a fantastic gift for sending the markets into a total tizzy with a few astonishingly ill-chosen phrases that her harassed officials have to charge around afterwards re-spinning to a media busy setting new headlines in the largest type font available to them.

Her latest gaffe, widely touted as the cause of the fresh welling up of concern over Irish sovereign debt, centred on remarks about investors in bad sovereign debt having to take a haircut on their investments. That sent shock waves through institutions across Europe and further abroad. Spreads on dodgy sovereign debt widened alarmingly. As it happens, those remarks didn’t come out quite right, and not for the first time either. What she meant was not that existing investors should expect to get burned, but that at some future date a mechanism should be in place which everyone understands at the time of making their purchase of sovereign debt, which amounts to a recognition of the fact that they are not getting 8% on their money for free. If the debt goes sour it carries risks with it and they will have to take some pain. The German taxpayer should not be understood to be underwriting everything for 100% of its value. That seems a perfectly reasonable proposition. Too bad it didn’t come out right the first time.

There is an extremely rich irony surrounding Germany’s position on sovereign debt which many are now beginning to notice. German taxpayers hate the thought of bailing out peripheral nations and they make life tough for their politicians over the issue. However, Germany is a huge beneficiary of the market’s sovereign debt jitters. Every time a fresh bout of fear washes through the markets and the euro tanks, German exporters see demand for their goods rocket upwards. The chairman of Daimler Benz, for example, says his company has just had its best third quarter ever, and any number of newly wealthy Asian citizens were celebrating the bargain prices on their new Mercedes and BMWs. And if Germany’s annoyed citizenry did force its politicians to pull out of the euro, German manufacturers would speedily find the newly reconstituted Deutschemark turning into one of the world’s strongest currencies – which would kill their exports stone dead. Food for thought, ja?

Further reading on the Irish economy and sovereign debt issues:

 


Tags: bailout , banking , economic recovery , EU , financial crisis , IMF , Ireland , Irish economy
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