Saturday, October 06, 2012

Another Lethal Blow for The ‘Celtic Tiger’

The Irish Policymakers Argue that the Country’s Economic Fundamentals are still better than That of Greece, Manish K. Pandey Analyses how Poor are they in Finalising the Rationale Behind Their Arguments

Ireland was the fastest growing OECD economy (averaging GDP per capita growth of 5%) since the mid-1990s until the recession hit its shores in 2007. While other OECD nations have at least managed to leave the strong recession winds behind, Ireland (thanks to its fragile banking system) is still at the midst of a deadly storm. What’s more? Ireland’s real GDP has contracted by more than 15% since the end of 2007 and is expected to shrink further. Even the yield on Irish 10-year government bonds has hit a record high of 8% so far this month, well above the 6.4% average reported in October 2010 and also above the 4% rate clocked just before recession in 2007.

Interestingly, Greek 10-year bonds had also traded around that rate before the recession, and then jumped by 780 basis points in the six months before the bailout in May 2010, after yields surpassed 12%. Though, yields on Irish bonds have risen by 370 basis points so far from their low in April, their continued strong upward movement is a clear sign of concern. It’s quite clear that the Emerald Isle economy was headed the Greece way (the first economy to tumble in Euro zone in May 2010) since quite sometime; and it’s quite unfortunate that the Irish policymakers waited till November 21, 2010 to wake up and apply post haste to EU’s European Financial Stability Facility and IMF for assistance. In two days, the international bodies approved a 90 billion pound package for Ireland, but under grilling austerity measures.

On the other hand, as Irish policymakers argue, the fundamentals of the Irish economy are much stronger than Greece’s at present as unlike Greece, the Irish government has enough cash in hand to fund operations through mid-2011. Moreover, the debt-to-GDP ratio of the Irish economy, which currently is 80%, perhaps seems more sustainable than the 130% ratio in Greece and in some sense, for the untrained eye, does not make a strong case for a bailout. As happened globally, even in Ireland’s case, the butler was to blame. The Irish banking system has almost but collapsed. The Economics Group of the US-based Wells Fargo Securities tells B&E through a communiqué, “The Irish banking system, which is being backstopped by the government, is essentially insolvent.” Ireland’s debt-crippled banks (which have already received a minimum of $61 billion from various government agencies) confirm that they are already in a dire situation. While AIB (Allied Irish Banks) admits that $16.39 billion – about 20% of its entire deposit base – has been withdrawn from the bank since June, 2010, BoI (Bank of Ireland) confesses that it had lost $13.66 billion in corporate deposits during August and September this year. In fact, one can understand the seriousness of the situation by the fact that Irish banks have lost a colossal $24.59 billion in deposits in September 2010 alone. Thus, unlike Greece, Ireland’s woes do not stem from government debt but from the government’s open-ended guarantee to cover the losses of the banking system out of taxpayers’ money, which sadly but inevitably will sink the economy whose fiscal deficit has already reached more than 30% of GDP.


Source : IIPM Editorial, 2012.

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