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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM

Irish Economy 2009: Threatening to quit Euro would be slow-motion national suicide; Leeway of €100 billion in borrowings before becoming lemmings
By Michael Hennigan, Founder and Editor of Finfacts
Jan 19, 2009 - 5:24:45 AM

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Irish Economy 2009: Ireland should put its economy on a sustainable footing before going cap-in-hand to Europe. Threatening to quit the Euro would be slow-motion national suicide at this time of peril and whether through the market or the European Central Bank, there is a leeway of €100 billion in borrowings before becoming lemmings.

Panic has been triggered by Taoiseach Brian Cowen's blundering response to the economic crisis, the collapse of Anglo Irish Bank - - the third-biggest Irish bank, which funded developers and commercial property during the boom - -  and the prospect of 150,000 job losses in 2009 coupled with a grim five years of public spending cuts and tax hikes, to bring stability to the public finances. 

Ireland's national debt increased to €50.7 billion or 32.5 per cent of gross national product (GNP) at the end of 2008 from 23.3 per cent in 2007. General Government Debt, used for comparisons in the EU, rose to 41.3 per cent of gross domestic product (GDP) from 24.8 percent at the end of 2007, the National Treasury Management Agency (NTMA) said at the end of December. It continues to be well below the EU average of 59.8 per cent.

Irish GDP is 20% larger than GNP because of the importance of multinationals in the Irish economy. The higher GDP helps Ireland in relation to the Euro Stability and Growth pact, which sets a limit of 3% of GDP on annual deficits and 60% on overall debt as a % GDP.

When the NTMA was established in 1990, it took more than three months' tax revenue just to pay interest on the debt. The Exchequer’s interest payments on the Debt were €1.545 billion, compared with €1.618 billion in 2007. This represents 3.8 per cent of tax revenue; the equivalent figure was 26.7 per cent in 1990.

Property-related tax revenues jumped from about 4% of total tax revenues in 1995 to almost 17% in 2007.

The National Pension Reserve Fund’s investment return from 1 January to 30 December 2008 was minus 29.5 per cent. Its annualised performance since inception is 0.6 per cent (compared to 6.0 per cent at end 2007). Its market value at 30 December 2008 was €16.4 billion.

The Department of Finance says that on the basis of existing policy, which assumes payment of the latest public sector pay deal under Towards 2016 and no other policy measures over and above those announced in Budget 2009, a General Government Deficit in the range of 11 per cent – 12 per cent of GDP is in prospect for each of the years to 2013. The Government regards this as untenable and has decided that urgent action over and above that already agreed will be taken.

The Irish national debt trebled in the period 1977-1982 and is set to do so again in the period 2007-2012.

The Department of Finance forecasts that the national debt will increase from €37.6 billion in 2007 to €111 billion in 2012 despite taking drastic action to reduce borrowings.

A big fall in living standards is in prospect as tax revenues will have to rise and servicing the national debt will again take a significant slice of revenues.

A back-stop will be provided by the European Central Bank.

Ireland's debt situation will be better than that of Italy and Greece but household debt levels as a % of disposable incomes are at record highs. Borrowing up to 100% of GNP again, after the end of the Celtic Tiger boom, would be far from a badge of honour. It would be a mark of shame.

The big question for the Irish people is - - will the economic crash prompt reforms in the governance, housing and planning systems, that will set the country on a sustainable course?

The answer is likely to be a negative, but it should be asked.

Key Statistics
In the period 1977-1982, the first of 2 occasions in a generation that the Irish economy was monumentally mismanaged, the national debt trebled.

In the period 2007-2012, the National Debt will also treble, according to Dept of Finance estimates. The reality is likely to be worse.

  • Dec 2008: Irish National Debt increased to €50.7bn/32.5% of gross national product (GNP) -  up from 23.3% in 2007
  • Dec 2008: General Government Debt/GDP ratio at 41.3% up from 24.8% in 2007. Euro rules limit GGD/GDP ratio is to 60%
  • Dec 2008: Annual Exchequer Deficit/GDP @ 6.25% compared with Euro rules target of 3% and 9.25% in 2009; Dept of Finance forecasts  General Government Debt of 90% of GDP by 2013 if public borrowing isn't cut.
  • Borrowing of €20bn required in 2009, if current spending trends continue, with €11bn of this borrowed to pay for current spending and €9bn borrowed to pay for capital projects. If this process continues unchecked, borrowing for current spending will increase from €11bn to €17bn by 2013.
  • Dec 2008: Irish Private Sector Credit (ex IFSC issues)/GNP 200%; Dec 2003 100% (Goodbody est) -  Germany & France @ 105%; Finland @ 84%. Irish credit growth has been funded out of external resources, with net external liabilities rising from 12% of GNP in 2003 to 67% of GNP at the end of 2007
  • Dec 2008: Irish household debt @178% of disposable income - up from 48% in 1995 (Goodbody est)
  • Irish GNP 2008: €156.3bn -  Dept of Finance
  • Irish GDP 2008: €187.4bn  - Dept of Finance
  • Population 4.2m - Census of Population 2006

Dept of Finance update on the Euro Stability Pact for European Commission - Jan 09, 2009

CSO detail of National Accounts - Dec 18, 2008

Gross Domestic Product (GDP) is the total value of all goods and services produced in an economy in a given time period, whether by domestic or foreign-owned firms, native or migrant workers.

Gross National Product (GNP) is the total value of all goods and services produced in an economy in a given time period which accrues to the residents of a country, be they resident there or overseas. The profits made by CRH, which has over 40,000 employed in the US,  are counted as part of Irish GNP - - even though over 80% of its shareholders are foreign residents.

The difference is made up of what are termed net factor flows, which includes net profit repatriation by multinationals and interest on the foreign component of the national debt. In Ireland's case, GDP is significantly larger than GNP because of the large US multinational presence there.


Monday, January 19, 2009


Boisterous and strong economies now imperiled



Two of the world's most open and successful economies face tough times as the global downturn marks the end of one era and opens a new period of peril and possibility for both. Singapore and Ireland have staked their fortunes on being small, export-oriented, investor-friendly dynamos. Singapore was one of the original Asian Tiger economies, and the label passed to the Atlantic nation in the 1990s, as 15 years of 5 percent average growth earned Ireland its "Celtic Tiger" reputation.

But as Kishore Mahbubani, a former Singapore diplomat and author of "The New Asian Hemisphere - The Irresistible Shift of Power to the East," told The Washington Times, "being globalized has its downside - when the world economy stutters, the more open economies feel the pain first."

Both Singapore and Ireland are officially in recession, defined as two consecutive quarters of negative growth.

Last week, U.S. computer giant Dell Inc. culled 2,000 jobs at its plant in Limerick, while Singapore's Trade Ministry stated Jan. 2 that it expected the economy to contract 2 percent in 2009, the worst predicted performance of any Asian economy for the coming year.

Ireland and Singapore in recent years have been at the top of rankings by the Heritage Foundation Index of Economic Freedom and the Foreign Policy/AT Kearney listing of the world's mostglobalized economies.

The downturn has raised questions about the benefits of globalization, but Robert E. Kennedy, executive director of the William Davidson Institute and a professor at Michigan´s Ross School of Business, told The Washington Times that "the success over the past 20 years of Singapore and Ireland is a sign that globalization is working. Traditionally, having a large home market was extremely important for development. Ireland and Singapore have outperformed the global economy by a large margin over the past 10 to 20 years."

So far, the downturn has hit Ireland harder than its city-state counterpart in Southeast Asia. Unemployment is projected to top 10 percent by the end of 2009, and government borrowing will help push spending far beyond the 3 percent of GDP limit prescribed by the European Union, as revenues slump.

Michael Hennigan, founder of the Irish financial Web site Finfacts.com, said, "Huge inward investment from the U.S. triggered the Celtic Tiger, but it was allowed to develop into an out-of-control property boom, rather than focusing on developing a domestic exporting sector. Between 2000 and 2007, employment in Ireland expanded by 40 percent - in construction, public services, retail and distribution - while employment in the international tradable goods and services sector fell."

Ireland's fiscal wriggle room is limited, as interest rates are set by the European Central Bank in Frankfurt, whose slow rate-change reaction to the global downturn sparked criticism across the continent during 2008.

Alan Barrett, economist at the Dublin-based Economic and Social Research Institute, saw few viable options in the short term for Irish policymakers.

"Ireland needs to regain its competitive edge so that it can position itself to participate in the global upturn. This means getting our cost structure into line with our competitors and will involve wage cuts," he said.

Such cuts are a touchy subject in Ireland, as in most of EU states. While private enterprise is cost cutting, Mr. Barrett paints a different picture of Ireland's public sector, saying, "The government will have to bring the unions around to this line of thinking."

Ireland cannot use the currency devaluation option often used when countries lose competitiveness, as it replaced the Irish pound with the Euro in 1999. 

Meanwhile, in Singapore, the services sector, about two-thirds of economy, has slowed. Singapore's port, one of the world's largest, last November recorded its first decline in traffic since 2001. One of Singapore's sovereign wealth funds, Temasek, is reeling from the subprime collapse in the United States, as it took heavy losses from its stake in Merrill Lynch.

However, its currency reserves mark one advantage Singapore has over Ireland. Mr. Mahbubani is confident that Singapore, with an estimated $170 billion in hand, "can adapt to changing circumstances, as it has in the past."

He added, "Economically speaking, right now the tide is out, and when that happens, all you see is the garbage strewn on the beach. But the tide must shift, inevitably."

French bank BNP Paribas has predicted, in turn, a V-Shape or rapid recovery for Singapore's economy in 2010 - a revival as sudden and sharp as the current downturn.

"The scale of the global policy response - monetary and fiscal - should ensure the recovery is more V- than U-shaped," said BNP Paribas economist Richard Iley, in a report titled "Asia: Apocalypse Now" - "In many instances, economies will experience a six- to seven-percentage-point swing in growth rates."

For Ireland, Mr. Kennedy goes against the prevailing grain with a sanguine long-term prediction. "Ireland is very well positioned to be the services workshop of Europe and should hold on to and strengthen its position as the EU headquarters of many global firms. I am bullish on Ireland´s future. The present gloom is an overreaction."

He also issued a cautious warning to Singapore: "Offshoring and outsourcing are opening up next opportunities for firms and new competitive risks. Singapore has advantages in being close to China, but it's a tough neighborhood, with lower-cost rivals with domestic market advantages, such as Malaysia, Philippines and Vietnam, ardently pursuing services exports."

Mr. Kennedy is author of a forthcoming book on what he deems "the next wave in globalization," called the services shift; seizing the ultimate offshore opportunity. He says that the world economy is undergoing "a transformative shift" and that future prosperity will accrue to those that "get it" that growth in future depends primarily on services.

Ireland and Singapore "got it" better than most during the past 15 to 20 years, but it seems to be an even bet on whether these recent bellwethers of globalization and prosperity get it going forward.

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