This weekend was dominated in financial circles by the debate over what Ireland should do next with most concluding that she should look for aid. I have suggested since the 17th of September that she should take assistance from the International Monetary Fund. To illustrate my point I would like to take us back to then and look at Ireland’s government bond yields. Her ten-year yield was at 6.15% which is 2% below where it closed on Friday and this was after a considerable improvement cause by bailout rumours and a “clarification” from Europe as to how private-sector bondholders will be treated. If you put this another way Ireland could only theoretically borrow at the 6.15% level right now up to 2012. So maybe 2 years rather than ten,assuming of course she could borrow at all now if she chose.
Of course Ireland is not currently borrowing at all as she has reserves of around 20 billion Euros which she is eating into so that she can avoid have to issue bonds. This has various implications. Firstly it does give Ireland some flexibility which is something that Greece in her distress lacked. Secondly it means that the current level of high interest-rates does not affect her directly as she has fixed-rate debt which is already in issue and is not forced for now to issue what would be expensive new debt.Unfortunately this strength also feeds directly into what are Ireland’s weaknesses. She has a political class whose strategy has varied only between “extend and pretend” and “kicking the can down the road”. To give an example of this the first estimate of the bail-out cost for Anglo-Irish Bank was 4 billion Euro’s and the latest estimate has been upgraded to 30 billion Euro’s. My fear is that they will fritter away this advantage by dithering and bluster. Whilst as a state Ireland can remain relatively unaffected by the current high interest rate levels for a while I would like to refer you to my article on Friday the 12th of November which discussed the implications for the private-sector which now faces very high interest-rates. It was high interest-rates which contributed so much to the world-wide recession in 2008.
Irish National Reserve Pension Fund
Ireland does have another potential reserve fund it could theoretically dip into. Its national pension fund was established in 2001 and its purpose is shown on its website.
The National Pensions Reserve Fund was established in April 2001 to meet as much as possible of the costs of Ireland’s social welfare and public service pensions from 2025 onwards when these costs are projected to increase dramatically due to the ageing of the population.
It’s latest valuation gives the fund a value of some 24.5 billion Euro’s. Accordingly it is a potential aid in the Irish struggle as it could theoretically help Ireland by purchasing some of her debt. However there are dangers here as its purpose is to help with pension provision not to bail-out the government’s failed strategy. Indeed Ireland’s future pensioners have been punished already as this fund is underwriting a new share issue by Allied Irish Bank of Ireland,which just to repeat myself is a commercial and not a central bank, and so far the fund has been directed to invest around 7 billion Euro’s in the Irish banking sector. The investment/underwriting in Allied Irish is at a price of 0.5 Euro’s a share compared to a market price as I type of 0.39 Euro’s as I type this so should things remain the same there would be an immediate loss of approximately 1.3 billion Euro’s.
So as I have demonstrated the correct response to the idea of using the National Pension Reserve Fund should be, haven’t Ireland’s future pensioners taken enough of a beating? This fund is supposed to invest around the world for the best returns and not to find itself full of investments that nobody else wants.
Should Ireland take the help offered by the IMF then as it is already on quite a severe austerity programme it needs only one major change and that is to scrap the Croke Park Agreement. As part of a deal to get some pay cuts in the public-sector the Irish government promised public service workers no further pay cuts for four years and no compulsory redundancies. And the accord provided for a possible refund of the pay cuts at a later date but only after major reform of the public sector has been secured. So this Croke Park Agreement potentially leaves public-sector workers shielded whilst the rest of the economy takes the pain and Ireland cannot afford this.
On its own Ireland’s government is unlikely to summon the resolve to do this but the IMF could come in and do the job for it.
Number Crunching and Ireland
I am sure that many readers are a little uncertain about the economic size/importance of Ireland so let me give some numbers as a guide. In 2009 she had according to Davys Stockbrokers.
Gross Domestic Product of 160 billion Euro’s
Gross National Product 131 billion Euro’s
Exports of 145 billion Euro’s
Imports of 130 billion Euro’s
Over the period of 2007 to 2009 or the peak period of the credit crunch her Gross National Product fell by 13.8% in volume terms or 19.4% in value terms ( in case you are wondering why this is so it was caused by falling prices as Ireland had disinflation).
If we now look at her finances then the Budget for 2010 which was set in December 2009 expected.
Tax receipts of 36 billion Euro’s and public expenditure of 57.9 billion giving a deficit of 21.9 billion Euro’s.
With the deterioration in her banking sector Ireland is now expected to have a fiscal deficit this year of 49 to 50 billion Euro’s. Put another way if you assume she continues to collect taxes at the same rate then the deficit will be equivalent to just under 17 months of Ireland’s entire tax revenue which gives it some context and a little chill up the spine I feel.
The reason I differentiate between Gross Domestic Product or GDP and Gross National Product or GNP is that it is GNP that Ireland can tax. The period where she was considered to be an economic “Celtic Tiger” was driven by low tax rates which attracted many multinationals to her shores. The problem of trying to tax people/companies who are internationally flexible and footloose is I hope clear.
Ireland’s importance to the UK
There have been some numbers quoted in the media which I feel are misleading including one or two claims that Ireland is the UK’s largest trading partner. Let me put the record straight. She is in fact number five on the UK’s list behind the US,Germany, France and the Netherland’s and in 2009/10 we exported some £15.3 billion of goods and services to her. The fact that this was down some £3.3 billion on the year before was a sign of the times.
As it happens we have an export surplus with Ireland that was around £6.5 billion but is now just over £3 billion. This is a particular shame as with our trade deficits we need every surplus we can get!
There are two other main issues. One is the level of Irish property purchases in the UK which were high at the peak of the boom. The numbers are surprisingly unclear but the best estimates are that of the assets that have so far gone into Ireland’s bad-bank or NAMA some 21% were in Great Britain and 6% in Northern Ireland which is likely to be something of a deadweight on our commercial property market.
The other is UK banks which are involved in Ireland and the main two are Royal Bank of Scotland and Lloyds banking group mostly via its ill-fated purchase of Halifax Bank of Scotland. As the UK taxpayer owns substantial stakes in both we all have an interest in this.
One side-effect of all this is quite near to me and it is Battersea Power Station. A landmark I have passed regularly for most of my life. It was owned by Irish property developers and is now owned by NAMA and over the past few days a new scheme has been announced. I would love to see it redeveloped as it is the largest piece of unused/barely used land in central London and much of it is derelict and decaying. My concern is that there have been so may of these plans and yet they failed in what were good times…….
The Current Situation
We have had a weekend of Euro zone officials and politicians telling Ireland to take help speaking to Ireland’s politicians who have dithered and obfuscated at every stage of her crisis so perhaps we should not be surprised that Monday has arrived and nothing has been achieved. I do not have high hopes for either camp as one set have a bail-out mechanism which may not work and the others could hardly have followed a more misguided policy. Given the relative size of Ireland’s economy it should be a relatively simple problem for the Euro zone to sort out and the fact that it is proving not to be speaks volumes for the competence of those involved.
Let us hope that a larger nation does not hit trouble as events then are likely to move too fast for the Euro zone to respond if it continues with the same pattern of behaviour.
I established an indicator of Ireland’s current position for rugby fans last week and would like to update it. The Aviva stadium at Landsdowne Road had 30,985 fans there on Saturday for the international against Samoa against a capacity of 50,000. More institutional incompetence I am afraid.