Ireland-One Year Later

We'll end our yearly look at the Irish by taking a brief look at their economy one year after the great collapse.  Today we're going to excerpt an article done for The Street.com by a guest writer, Paul O'Connor. 

A year ago, Ireland was the worst-performing sovereign in the EU.....For most of 2009, Irish debt was perceived as more risky than that of Greece. Now, however, Ireland is no longer the focus of EU concern. Greece dominates the headlines, with Spain, Italy and Portugal in a supporting role.....This, in {Paul's opinion}, is largely due to strong and decisive action by the Irish authorities to address the problems of the Irish economy.

For 15 years prior to the current financial crisis, Ireland was an economic miracle. The turnaround in its previously recession-ridden fortunes began in the early 1990s, as progressive policies, including a sharp reduction in corporate tax rates, put Ireland on the road to economic prosperity. More than a decade of unbroken growth followed, with annual growth rates ranging from 3% to 11%. What was once a poor nation within the European Union became one of the best-performing and wealthiest countries. Public finances prospered......Ireland reduced its debt-to-GDP ratio from almost 95% in 1990 to 25% in 2007, giving it one of the lowest debt-to-GDP ratios in Europe. Known throughout history for its supply of emigrants to foreign shores, Ireland experienced an unprecedented wave of migration from many nations. The world talked of Ireland's "Celtic Tiger" economy.

But the boom years sowed the seeds of the problems experienced during the most recent crisis. Land and property values increased dramatically as the economy expanded, generating demand from both developers and consumers for more credit. The construction industry grew to 15% of the Irish economy in 2007, up from 6% 10 years earlier. Property-related taxes accounted for an increasing proportion of government revenues. The healthy state of public finances led to a relaxation of government spending and an expansion of the public sector......The rapid expansion of credit to the economy, which had accelerated from 2003, exposed the Irish consumer and banks to any potential change in economic circumstances.

Ireland had a number of major advantages at the onset of the credit crisis. Its low debt-to-GDP ratio, low level of unemployment and a reserve fund established from budget surpluses all helped to insulate it from the worst excesses of an economic decline. Nevertheless, the decline has been dramatic. The residential housing market has fallen more than 30% since its peak in early 2007 and prices are now at 2003 levels.....Retail sales have declined, incomes have been cut and unemployment has risen to over 12% from a low of 4.4% in tandem with the sharply contracting economy.....In response, the Irish government has taken tough and decisive measures.

Following the failure of Lehman Brothers and the dramatic impact on the international funding markets, the Irish government moved swiftly to announce a guarantee of all Irish bank liabilities. This ensured that the banks could continue to fund themselves while broader solutions were investigated......The initial Irish guarantee remains in place until October of this year. A new guarantee scheme has recently been approved by the EU, which allows Irish banks to issue guaranteed debt for up to five years.....

The second key feature of the Irish banking reforms is the recapitalization of the sector in line with developing international standards. The state issued a clear message at the outset of the financial crisis that it would support the Irish banking system.....A further and probably more significant round of recapitalizations will take place this year following the restructuring of the banks' loan books.

NAMA -- National Asset Management Agency

The establishment of NAMA is the third key factor. Faced with mounting losses in commercial loan books, the government decided to remove all major commercial and development loans from the banks' balance sheets into an asset-management agency. This step involves the removal of 77 billion euro of loans to the top 50 property developers from the balance sheets of the Irish banks. The transfer of assets to the new agency -- set up as a special purpose vehicle, so separate to public debt -- begins in the coming weeks and will be completed later this year. This shift removes the uncertainty surrounding future losses arising from these loans.

The lessons of the credit boom will be applied through a strengthening of the financial regulatory system in Ireland. A new head of regulation has been appointed and the Financial Regulator has been reintegrated into the Irish Central Bank, re-establishing the link between financial stability and financial regulation. A new strategy centring on risk-based regulation, implemented by a well-resourced regulatory and enforcement team, is under way.

Faced with a mounting budget deficit, the government has introduced three major budgets in the space of 13 months. This resulted in increased taxes, imposing a series of new and higher charges on all members of the workforce. The third budget imposed a levy of 7% on public-service workers, effectively reducing the government wage bill, and reversed the expansion of the public sector.

So, the picture has changed. The semi-joking comparisons with bankrupt Iceland have stopped. And while those members of the public hardest hit by the slump and the government's tough recovery strategy may not be smiling, the pricing of Irish sovereign debt shows that the market's reaction has been positive.   The crisis is not yet over. But the Irish authorities are showing a resolve to take whatever action is necessary to re-establish the fundamentals of growth for the Irish economy.

The Celtic Tiger Bites Back {Subscription may be required}