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News : Irish Economy Last Updated: Nov 16, 2010 - 7:30:33 AM


IMF says Ireland can 'manage' its financial crisis well; Can we avoid the Fund's embrace?
By Michael Hennigan, Founder and Editor of Finfacts
Nov 14, 2010 - 7:14:09 AM

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Taoiseach Brian Cowen meets President Bill Clinton in the Taoiseach's office, Dublin, Oct 01, 2010

The IMF (International Monetary Fund) managing director said on Saturday that Ireland can 'manage' its financial crisis well. However, can we avoid the Fund's embrace? 

“Everybody knows that the situation with Ireland, it’s a difficult situation,” Dominique Strauss- Kahn told reporters on Saturday in Yokohama, Japan. “So far I haven’t received any kind of request. I think they can manage well. If at one point in time, tomorrow, in two months or two years, the Irish want support from the IMF, we will be ready.”

Strauss-Kahn who was in Yokohama for the Asia-Pacific Economic Cooperation (APEC) annual summit, said Ireland's difficulties were much different from Greece's, however.

"The Irish situation is mostly linked to the problem of the banks, especially one big bank, not only one, but mostly one big bank. It's not the same thing as the Greece problem, which was at the same time a fiscal problem but also a competitiveness problem."

So Ireland is not Greece and Greece says it is not Ireland!

Last Monday, Greek Finance Minister George Papaconstantinou was reported to have said that his country was not suffering the same banking problems as Ireland. Speaking in London he also said that he expected the country's deficit would be 5.5 percentage points lower by the end of the year. "Greece is not Ireland, it doesn't have banking stability problems," he said in a speech.

The English writer William Somerset Maugham (1874-1965) said: “It's no good crying over spilt milk, because all the forces of the universe were bent on spilling it.” Nevertheless, it's important to recognise the enormous consequences of the guarantee of existing bank debt in the State guarantee that was issued on Sept 30, 2008.

Ireland and Denmark were the only countries during the global financial crisis to guarantee existing bank debt and on the first day of the Irish guarantee, Minister for Finance Brian Lenihan said: “We are not in the business here of bailing-out banks.”

Advisers Merrill Lynch had warned that an extensive guarantee of liabilities at the State’s main banks could “hit the national rating” and allow poorer banks to continue in operation. However, they advised the minister against a policy of liquidation or letting a bank become insolvent, saying “this was the worst thing that could be done” as it would accelerate trouble for all other institutions. Merrill Lynch proposed an alternative to the guarantee scheme in the form of a “secured lending scheme” for banks whereby commercial property could be exchanged for Government bonds or cash.

There were exactly four months between the collapse of US investment bank Lehman Brothers and the announcement  in mid-January 2009 that Anglo Irish Bank would be nationalised.

Strauss-Kahn referred to "one big bank" but there was also the recklessly run Irish Nationwide Building Society (INBS) and the bail-out of the two institutions will cost at least €40bn  --  more than 25% of annual gross domestic product. INBS had become a commercial property lender with almost half its commercial loan book for property in the London region.

Minister Lenihan had declared the bank guarantee “the cheapest bailout in the world so far,” but it prevented a restructuring or orderly closure of two insolvent institutions and left taxpayers with the huge bill.

The period post-Lehman period was marked by the collapse of Icelandic banks and several rescues across Europe. Ireland would not have been an outlier in restructuring its banks and imposing losses on bondholders at that time.

Some months later, the Obama administration restructured General Motors in that manner.

Is Ireland in dire need? CNBC insight with Peter Boockvar, Miller Tabak:

Besides a financial repair strategy, there is also an urgent need for a jobs strategy and structural reform.

  • The four-year plan detailing €15bn of tax rises and spending cuts with a first year adjustment in 2011 of €6bn, is important for market credibility but if by this time next year, the forecast growth rate for 2012 is not going to be met,  investors would surely head for the exits.
  • In 1987, Ireland's debt to GDP ratio was 125% and the spread on Irish 10 year bonds with the German bund was 700 basis points (bps) or 7%.  On joining the European Exchange Rate Mechanism (ERM) the spread began to fall, and was down to 100bps in 1992. Before joining the euro in Jan 1999, the spread was 10-20bps. There was a similar pattern for other countries and in the third week of July 2007, when the subprime crisis was just placing the world on notice, the yield on the 10-year maturity Irish sovereign bond was lower than the yield on a comparable German bund.
  • Higher sovereign yields are also impacting the cost of bank fund raising in the markets, which will impact the real economy.
  • While spreads may narrow as the financial crisis recedes, there will be no return to the 1998-2007 situation as flight to quality and risk premiums will continue to prevail.
  • Forecasts for 2012 and beyond can only be a guess.
  • The Department of Finance assumes emigration of 100,000 people in 2011-2014 and the forecast for growth over the next four years sees a cumulative increase in output (GDP) of 11%. The peak year will be 2012, where the Department of Finance sees growth of 3.2%, falling back to 2.75% in 2014. In 2011, GDP is expected to be 1.75% and GNP (gross national product) which excludes the profits of the multinational sector, will be lower.
  • The export situation has been good in recent years. However, the pharma/medical devices sector accounts for more than 50% of merchandise exports; these sectors are highly capital intensive, have a high import content, and only employ 45,000 in a workforce of over 2m.  Exports rose in current price terms by 50% in the period 2000-2009 but employment fell.
  • In Ireland, total permanent full-time employment in the manufacturing and internationally traded services sectors amounted to 272,053 in 2009. It was 276,287 in 1998. Employment in foreign-owned firms was 132,596 in 2009 and 140,281 in 1998.
  • Foreign-owned firms are responsible for 90% of Ireland tradeable goods and services exports. Only 3.5% of Ireland’s services exports come from Enterprise Ireland clients.
  • Ireland is more dependent on US foreign direct investment (FDI) than any other rich country. However, while the US is facing big economic challenges itself, Ireland has limited direct links with the big emerging economies. Besides, Ireland would not be an optimal location for serving those markets.
  • This week the US Conference Board said the global economy will grow at 4.4% from 2010-2020, about 0.7 of a percentage point faster than 2000-2010 and 0.3 of a percentage point faster than 2000-2008. Advanced/developed economies will account for less than 1% percentage point of global growth from 2010-2020, while 3.4% percentage points will come from emerging economies.
  • Bill Gross, founder of the trillion-dollar bond fund manger PIMCO said recently that investment returns for the past 10 years have averaged 3% but there are still expectations of much higher returns. He said that prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated. With deleveraging the fashion du jour, and yields about as low as they are going to go, prosperity requires another foundation.
  • On jobs, the Government is banking on university research but it will never be a jobs engine.
  • One of the first high tech clusters in Europe was in the UK in the area around Cambridge University. It is called Silicon Fen and has five times more research and development jobs than the UK average. There are more than 30 leading research institutions across the East of England, and the area is said to be characterised by a culture of science-based start-ups and university spin-outs. After 30 years, Cambridgeshire has about 30,000 jobs in technology companies and the majority of firms employ less than 10 people.
  • Enterprise Ireland said last July that investment in over 800 start-up companies over a 20 year period (1989 - 2009) yielded only about 14,000 jobs. Since the agency started funding the commercialisation of academic research over 10 years ago, 140 spin-out companies have been created employing over 1,000 workers -- an average of 7 employees per firm.
  • ETH Zurich, one of Europe's top science universities could only produce less than 1,000 jobs from over 100 spinouts in a decade.
  • Finfacts is arguing for realism not to scrap the science budget; we have a European market on our doorstep and a great opportunity for using R&D to develop the food and drinks industry. Policy focused on waiting for a Google, Facebook, Apple or Microsoft, is doomed to fail. Besides all these giants were not pioneers in their sectors. They improved on others' ideas.
  • Irish competitiveness has improved because of the severe recession but there has been no reform so far; there is a slow motion process underway in the public sector but there is an urgent need for overseas mangers with a proven record of implementing public sector change, to take control.
  • Fine Gael has made a start with a set of reform aspirations but there is little appetite for significant change among the insiders.
  • The protected private sector remains unreformed with both an opportunity for continuing transfers from public funds and effectively cartel type charging of consumers. Land rezoning, the subject of an ongoing 13-year public tribunal is an activity riddled with conflicts of interest and which makes land scarce in a country that is 4% urbanised, but the corrupt system remains unreformed.
  • Both the trade union congress ICTU and the business body IBEC, steer clear of advocating significant reform as do academics. This is why Finfacts has argued that IMF intervention may be the only chance Ireland has to implement reform and to give the country the chance to be run with accountability, competence and with a sustainable economy similar to the best in Europe.

Lena Komileva, Chief economist at Tullett Prebon joined CNBC to dicuss the outcome of the G20 meeting and the market turmoil caused by fears surrounding Ireland:

Even within the confines of the State bank guarantee straitjacket, the outlook would have been much better if it hadn't taken 2 years to get a grip on the banking crisis.

Now that the Jeannie of investor hysteria is out of the bottle, against a backdrop of months of negative international media reports, it is more likely than not that we will have to tap the EU-IMF bail-out fund. That is an issue for the short-term.

Both a credible jobs strategy and structural reform are however what will put the economy on a sustainable long-term path.

VIDEO: Dr. David Kelly, a graduate of UCD, who helps oversee $445bn as chief market strategist for JPMorgan Funds, talks about the debt crisis in Ireland and other European nations. Bloomberg said his father had been a member of Dáil Éireann  --  possibly the late Prof. John M. Kelly.

Relevant Finfacts articles:

Ireland: Barometers of stress rise as reality and fantasy compete in economic discourse

Wall Street Journal says Ireland's fate tied to doomed banks

Irish Jobs Crisis: Better data reports and higher emigration; Market demand remains the key

Why should the possible intervention of the IMF be viewed as 'scary'?

Irish Economy: "If it were done when 'tis done, then 'twere well it were done quickly"

The invisible Irish unemployed and the challenge of creating 180,000 net new jobs

Ireland can choose a path to greatness or perdition

World economy will grow faster in 2010-2020 than first decade of century; Developed countries will account for less than 1% of annual global growth

Innovation Ireland: O’Keeffe urges latest research policy advisory group to focus on new 'high-quality jobs'

US job creation is dependent on start-ups and young companies; Falling cost of entry likely will lower survival rate

Irish Innovation: Ireland banking on the faith-based smart economy strategy

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