Ireland’s economy is performing strongly but can it pay for her socialised bank debt?

This morning has opened with some good news for the Irish economy and it is fair to say that she has been in a relatively good run in economic life. In geographical terms Ireland is one of the farthest flung of the Euro area economies and perhaps that symbolically has helped a little. I doubt that her near neighbour the UK has helped much as it has struggled overall in 2012 but perhaps her many links with the United States have. When I have reviewed the state of the Irish economy before I have concluded that whilst she has strengths such that she has been the best performer of the peripheral Euro area countries she also has weaknesses. Let us examine the evidence for where she stands right now.

Her Service Sector

If we look at the latest Purchasing Manager Index we get the theme for it from this.

Strongest rise in activity since October 2007 as new business increases sharply

Irish readers can permit themselves a smile at this point as this is the best Euro area headline I can recall in 2012. If we look deeper into the detail we see that the index rose to 56.1 in October from 53.9 in September on a scale where numbers above 50 demonstrate expansion. We see also this.

A sharp rise in new export orders was also recorded, extending the current period of expansion to 15 months. Moreover, the latest increase was the fastest since June 2010.

And in addition Irish eyes may be particularly smiling at the section below.

Employment increased for the second month running, and at a solid pace.

In a country where the unemployment rate is 14.8% then any increase in employment which may help with this is welcome. The latest Live Register numbers had already shown a fall in unemployment of 10,260 over the past year,although this was accompanied by an increase in the unemployment rate of 0.3% to 14.8%. It made me wonder if net migration was a factor here and as it was -34,400 in the year to April 2012 it may well be but we can only suspect its full influence as the figures are some months behind. What we do know is that the labour force in Ireland has shrunk.

What About Manufacturing?

Last week we received the latest data in terms of the Purchasing Manger’s Index for Irish manufacturing and it too showed growth as her reading expanded from 51.8 in September to 52.1 in October. If we look at little deeper we see that the background is again optimistic.

A solid expansion of manufacturing output was recorded in October. Production rose for the sixth successive month, and the latest increase was the fastest since June. Respondents mainly linked higher output to rising new orders.

Also we see optimistic news on employment

An eighth successive rise in employment was recorded as firms responded to increased workloads and expectations of further growth of new orders in coming months.

So we can conclude that the most timely data that we receive shows the Irish economy to be in good shape. Indeed particularly good shape if we consider the position elsewhere in Europe.

Let Us Examine The Official Data

We need to go back in time for these but the numbers at the end of the second quarter told us this.

Preliminary estimates for the second quarter of 2012 show no change in volume in GDP (Gross Domestic Product) compared with the first quarter of the year while GNP (Gross National Product) registered a 4.3 per cent increase. Compared with the same quarter one year ago GDP decreased by 1.1 per cent while GNP increased by 2.9 per cent.

So if we look at her overall economy we see that it shrank on a year ago but it comes with the counterpoint that the part she can tax most easily which is GNP rose by 4.3% on the previous quarter and 2.9% on the year before. This matters particularly for Ireland because her low Corporation Tax rate and enthusiasm for companies like Google to open offices there means she has a low of what are in effect “non-domiciled” companies and corporations there. This is what the difference between GDP (39.7 billion Euros) and GNP (33 billion Euros) mostly measures and as you can see the gap is large. If we look back it was a feature of the so-called Celtic Tiger economy in the boom years as foreign companies flocked to Ireland. But the catch is simple, if a company comes to you because you have low tax rates and you raise the tax rates what do you expect it to do? Tucked in there is a problem for Ireland as she struggles with her fiscal deficit and national debt.

Government Bond Yields Have Fallen

The situation here has improved. Ireland’s stock exchange calculates an overall index for her government bond market and this has risen from 93.05 six months ago to 103.33 now. She does not actually have a ten-year bond but her longer-dated yields are of the order of 6.6 to 6.7%. So way too high still but considerably improved is the summary.

What About Her Banks?

There are ongoing problems in this area. There was an enormous bail-out of the Irish banking-sector and it took place on such a scale that the whole economy was in effect put in hock to finance it. However it would appear that they have ended up financing more than they bargained for. the 20.7 billion Euro bail-out of Allied-Irish Bank (AIB) was discovered to have this feature last week. From Nama Wine Lake.

The AIB pension fund was topped up with €1.1bn of funds that can be attributable to the taxpayer bailout.

It looks as though this may also be true at Bank of Ireland and Anglo-Irish Bank although these numbers have yet to be declared and quantified.  UK readers will see echoes of the situation of ex-Royal Bank of Scotland head Fred Goodwin in the numbers below.

The man who bankrupted Allied Irish Bank, Eugene Sheehy gets an annual pension of €529,000.

Regular readers will be aware that I have written many times that bondholders in Irish banks should have been made to fulfil their obligations rather than being repaid, and let me be clear that this would have meant the bonds being declared worthless. Now it seems that the institutionalised corruption at the heart of Ireland has another costly feature for the Irish taxpayer to carry.

Is It the Debt Stupid?

Ireland was a country with a low-level of national debt pre credit crunch. You could have looked at the numbers and concluded that she was very fiscally conservative as her level of national debt dipped to one-quarter of her annual economic output. However this was to ignore the rising level of private debt particularly in her housing market and her political classes willingness to socialise losses in her banking sector.

According to Eurostat she now has a national debt of 179.7 billion Euros.  It calculates this as being 111.5% of her GDP and that this ratio had risen by 3% in the second quarter of 2012 and by 10% compared with a year earlier. So relatively high and rising quickly. In 2011 she recorded a fiscal deficit of 13.4% of her GDP.

Now let us compare this another measure of her ability to pay which is her “taxable capacity” or GNP. If we use the latest ratios of GDP to GNP we now get her national debt being 134%. As you can see this is more of a problem. Whilst I am not saying that every non-domiciled company would leave immediately if she tried to raise tax rates it does represent quite a problem as some/many no doubt would.


We have seen today that there are grounds for optimism for the Irish economy in her latest data. In the prevailing economic climate she is putting in a good performance. However for her to reach escape velocity and exit the aid programmes she needs to find a way of dealing with the following. Her fiscal deficit is high and she plans to reduce it via euro area austerity. As she expects unchanged revenues all of the strain is going to be on reduced central government expenditure. The plan is for this to fall from 48.8 billion Euros in 2011, to 44.1billion in 2012, to 43.5 billion in 2013 then really be squeezed again to 40.8 billion in 2014 and 38.8 billion in 2015. We know the economic distress caused by that sort of action elsewhere. Also the squeeze is even harsher than it looks on the surface because expected debt interest is rising.

So we see that whilst she is doing well the gravity of austerity may yet make Ireland and her economy crash-land.


10 thoughts on “Ireland’s economy is performing strongly but can it pay for her socialised bank debt?

  1. Hi Shaun,
    Amazing to see a country doing as well in the current environment, but it still doesn’t get the debt down.
    The figures don’t seem to be realistic to me. If GDP is £160 billion, is government expenditure really only £48 billion, about 31% of GDP, falling to 24% in 2015?
    On another point, I could not believe that the pension could be that high. It seems amazing that these guys got away with so much

  2. I agree that bond holder should have been wiped out. BUT and it’s a big but only after all the loss aborbing instruments in front of them were.

    The reason this hasn’t happened is because the Irish government used the national pension fund to buy huge amounts of these shares. Wiping out the ordinaries would have reduced the value of the Irish pensions asset value significantly. Politically too high a price to pay.

    They Irish ended up changing the law in their country so they could inflict some sharing on subordinated debt. However the ECB would not allow them to carry on and do the same for the senior debt.

    Even this came to a premature close as some of the debt was written under UK law and coercive tenders such as were invisaged were likely to be deemed illegal here and given some of the Irish entities have significant UK holding, punative redress would have been possible. Some Greek debt has also been subject to UK law and it’s holders have not taken a haircut, have been paid their coupons and on call have been redeemed at par. In fact in order for the Greek restructure to have crediibity all new debt was written under UK law.

    However we should not be smug. The Europeans whilst being forced to swallow the writing of new debt under UK law in London have a plan. This plan is the forthcoming banking union, part of what it attempts to do is give the European parliament the ability to rewite bond terms and conditions as necessary, once it’s passed into UK law, bonds that had been safe by virtue of being under the juristication of the UK will no longer be. Hence it’s only a matter of time before the new Greek debt and indeed all the existing debt can if necessary be legally written down.

    Game set and match to Brussles.

    • I think that this is about the most depressing comment that i have ever read!! As I understand it, the UK has a perfectly good system where the purchasers of bonds know what they are buying and the nature of the legal protection that surrounds their purchase. The politicians recognise the value of this, as they have had to issue Greek bonds under UK law. This is going to be overridden by the EU just like everything else. I would make a couple of points:
      1. Once the rule of law on the sanctity of owning property the end is nigh for any civilisation
      2. It is just amazing watching the EU act as though there is nowhere else for anyone to go. If I have understood you correctly, investors will charge a high risk premium for buying bonds in Europe for two reasons. First, they will see that politicians can force write downs and secondly, that politicians in Europe are quite happy to change the rules even as the game is being played.

    • Hi Martyn and welcome to my part of the blogosphere.

      I agree completely that the value of the shares in many of these banks should be zero. It is not just true in Ireland as my post on Friday discussed RBS in the UK for example in the same vein. As well as zombie banks we have zombie share prices!

      The situation at the National Pension Reserve Fund is simply shameful. A good idea a sovereign wealth fund to help pay Irish pensions has been largely “invested” in her banks just when no other investor wanted too. So what was a good idea has found itself taking a caning to help political imperatives. For those who have not followed this situation let me quote from the NPRFs annual accounts.

      The Directed Portfolio returned -25.7% in 2010 due
      to reductions in the market price of the ordinary
      shares of Allied Irish Banks and Bank of Ireland and in
      the valuation of preference shares in both institutions
      held by the Fund.

      In 2011 the Directed Portfolio returned -58.1%
      which was due to reductions in the valuations of
      the ordinary and preference shares of Allied Irish
      Banks and Bank of Ireland held by the Fund.

      The above is value destruction writ large…

  3. hello shaun

    hmmm, seems then that Ireland is still bust then

    so how much compound growth is needed ?

    they would have been so much better letting the banks go but I guess the big stick was shown to them from across the Irish sea – seems still they are in thrall to the British!

    come Ireland you wanted to be free in 1922 – make it so!


    PS: would have been fun , think of the revenge on the British as our banks collapsed !

    hmm, time for more popcorn …

    • Hi Forbin

      That is a good question and the immediate answer is the sort of growth the “Celtic Tiger” produced. Except that the drivers of this such as housing,banking and attracting oversea companies are in the case of the former two unavailable and the third watched over by her Euro area partners. 4% growth would do it but where is it going to come from?

      Are the Irish in thrall to us? I think that has gone and been replaced by the alternative choice of the “Kaiser of the King”.

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