CELTIC CRONYISM

Having indulged in all of the vices of the “boom years”, Ireland is now in more familiar territory.

“The public are entitled to have an absolute guarantee of the financial probity and integrity of their elected representatives, their officials and above all Ministers.  They need to know that they are under financial obligation to nobody.”


-Bertie Ahern, member of the opposition, Dáil Éireann transcript, December 1996

Taken in light of all that has transpired in Ireland since 1996, I believe that the above quote perfectly captures the essence of Keith’s mantra, “Numbers don’t lie; politicians do”.  In 1997, Mr. Ahern was elected Taoiseach, or Prime Minister, largely due to his man-of-the-people image that earned the public’s trust.  Suffice to say, he is not held in the same esteem today.  From 1997, his government was credited with creating the “Celtic Tiger” and he held power for over a decade before resigning in 2008.  Given the current state of affairs, and the obligations that the Irish people are now under, the phrase “Celtic Tiger” is almost embarrassing to recall.  The issues facing Ireland are similar to those facing the U.S.  Elevated debt, personal and private, loom over future generations and political leadership, not fear-mongering, is desperately needed. 

In the last decade, Ireland’s close-knit power circles worked closely to keep the good times rolling.  In 2006, Bertie Ahern astonishingly declared that the “boom times are getting boomier”.  In 2007, he was reelected.  In early 2008, Leader of the Senate and “property investor” Donie Cassidy said the following, “I will remind the House, perhaps in 12 or 18 months, when prices have again increased by 25% or 30%, that they were told this by the Leader of the House.”  Irish leaders and businessmen grew increasingly vocal, and spoke with more and more certainty, on housing and the economy as warning signs mounted.  The bubble in the property-fueled Irish economy had the three signature characteristics, as discussed by Richard Peterson and Keith on Bloomberg TV last week.  It was a great story, it was not going to end, and prices kept confirming that it was a great story that was never going to end.

Of course, everyone had a stake in keeping the party alive and there is now a massive price to pay.  The fiscal deficit of Ireland stands at 11.7% of GDP.  With the national debt ballooning and the International Monetary Fund “monitoring” Ireland’s situation, many have been calling for a right-sizing of the bloated public sector in Ireland.  While politically frail, the current government has taken some small steps in addressing that issue.  Despite the importance of the public sector cutbacks to date, the cuts amount to a mere €4 billion in savings.  To run the country day-to-day, the government is currently borrowing €20 billion per annum.  The numbers don’t add up.

Anglo Irish Bank is the bank most synonymous with the property bubble and enjoys close ties with the ruling political party, Fianna Fáil.  When the government first moved to insure the liabilities of the six major Irish institutions in 2008, Anglo was to receive €4 billion. Currently it is expected that the cost of bailing the bank out may amount to €22 billion (this will almost certainly increase).  For context, Ireland’s 2009 Gross Domestic Product is estimated to be $177 billion, or €131 billion.  It’s not only banks that are being allowed to redistribute losses.  According to The Irish Independent, Sean Quinn - then Ireland’s richest man - had amassed a €2.7 billion exposure to Anglo over two years.  His losses on that investment now are estimated to be €3 billion.  The government and Anglo struck a “share placement” deal to reduce the bank’s exposure to the entrepreneur.

Exactly how burdened the taxpayer will be due to the government’s National Asset Management Agency (NAMA) taking on toxic property loans from financial institutions is unclear.  The book value of loans acquired form Anglo Irish Bank is estimated by NAMA to be €10 billion.  While some are speculating that the bailout for Anglo alone could cost each taxpayer €22,000, as yet it is uncertain exactly what value the securities will be assigned.

Ireland’s primary trade partner is the U.K. and the Euro is currently trading at £0.88.  As a result, Ireland’s economy is far less competitive; for much of the last decade the Euro traded in a range from £0.55 to £0.70.  Furthermore, with free movement of people and goods between the Republic of Ireland and Northern Ireland, small businesses have been adversely affected by consumers taking advantage of the “cheap” Pound in Northern Ireland.

CELTIC CRONYISM - GBP euro

With the cumulative debt on Irish mortgages having grown at three times the annual rate in the euro zone between 2004 and 2008, the subsequent crash has left many homeowners in negative equity.  Egged on by politicians and “experts”, many paid prices that were “bottoming out” in 2006.  According to the TSB/ERSI House Price Index, house prices have declined 31.5% from their February 2007 peak.  As prices continued to slide, politicians and media personalities only firmed in their convictions that prices would “never be cheaper” again.  With private debt servicing at elevated levels (chart below), Irish consumers face significant interest rate risk should the ECB decide to raise interest rates.

CELTIC CRONYISM - consumer debt interest irl

The impact of public and private debt being saddled on the Irish for generations to come is clear to see in the data.  Following years of immigration, the familiar flow of emigration has returned.  In 2009, 93% of Irish emigrants were under the age of 44, according to the Central Statistics Office.  These people are valuable; 61% of the total Irish population have attained a third-level degree (I suspect that this is skewed towards the younger cohorts of the population). 

CELTIC CRONYISM - emigration ireland

This chart paints a depressing picture for Ireland’s future.  During previous waves of emigration in the 19th and 20th centuries, there were countries with fairly lax immigration policies that Irish people quickly took advantage of.  Despite popular destinations such as the United States, Canada, Australia, and New Zealand now carefully limiting the number of immigrants coming through their borders, it is telling that the number of emigrants from Ireland has increased so steeply.  While the politicians bicker, people are voting with their feet.

Many commentators are gaining optimism following a marginally positive comment from Moody’s last week.  The agency downplayed the role of debt in Ireland’s future, instead emphasizing the prospects for economic growth as being of primary importance.  The agency also decried that NAMA is an “ingenious mechanism”.  Perhaps they are correct; that is certainly what I want to believe.   However, the statement from Moody’s reminds me of a passage I read recently on Wittgenstein’s ruler, “Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler”.  The less credible a source, the more a statement from that source will be about itself rather than the object of its statement.  At Hedgeye, that sums up how we feel about compromised ratings agencies.  For many Irish people, it also captures how they feel about the vast majority of Irish politicians and their lack of ability or inclination to resolve the country’s dilemmas.

Rory Green

Analyst