Facilitating dialogue to promote open and multi-faceted discussion and awareness

This picture pretty much explains it all. I actually saw this on the street of Dublin as I was walking back to my hotel from a pub down the street and snapped the picture with my phone. Ireland has grabbed the international economic headlines, pulled down by severe over leveraging, a steep fall in inflated property values, and the current economic zeitgeist of austerity spurred by Greece’s crisis and subsequent bailout. Ireland is in between a rock and a hard place; an economy built upon exports and services, but bound by regulations as a part of the EU, and with a debt load taller than Carrauntoohil.

Here’s a quick look at the numbers:

Property prices rose more rapidly during the housing bubble in Ireland than in any other developed country, then burst sending values tumbling 50%. The newest Taioseach, Brian Cowen, and government have implemented both capitalization programs for banks and draconian budget cuts, slashing welfare spending and public payrolls. Irish rate of growth in GDP went from 5.6% in 2007 to -3.5% in 2008 and even steeper fall to -7.6% in 2009. Irish 10 yr bond yields have risen to 9% from 5% in August (Fitch recently downgraded Irish debt to BBB+, the same level as Libya and just a few notches above “junk bond” status), unemployment grew to 11.8% in 2009, public debt is more than 64% of GDP. and Ireland is suffering from the second lowest deflation rate in the world at -4.5%. This all as one Chief Investment Officer voices the concern of so many: “Facing facts like these, each morning when I wake up I have to wonder, ‘Why is today not a good day for a wholesale run on the Irish banking system?”

What are some of the policy responses that the Irish government has implemented in order to combat the severe slump? One response was the creation of NAMA, the National Asset Management Agency. NAMA is known as the “bad bank” because it will essentially buy up toxic assets private banks have acquired, anticipating “that it will purchase €81bn of loans – -  and it is likely to become Europe’s biggest landlord.” Recapitalization of banks is an ongoing fight, as the overall bank deposit base has contracted by 15%, demonstrated by the bank of Ireland’s loan-to-deposits ratio increasing from 145% to 160% in November alone, while the government continues trying to pump more capital into these institutions. This sorry news has some predicting that the Euro will plunge to .85 cents from a current $1.33 against the dollar this year.

Another policy response has been draconian cuts in the budget. Although more than a million people will feel the cuts in social welfare and child benefit payments starting today, these austerity measures were implemented over a year ago to little avail. Cuts were implemented in public payrolls ranging from 5% to 15% depending on pay grade, and amazingly Irish Finance Minister Brian Lenihan promised late in 2009 not to increase the infamously low Irish corporate tax rate of 12.5% while cutting VAT a measly .5%  to 21%. So far, none of these austerity measures seem to work, as general government debt grew from 25% of GDP in 2007 to an estimated 65.6% at the end of 2009.

So……bad news huh? Yea, it’s going to be a tough next few years for Ireland, as supposed austerity measures have not convinced the bond vigilantes of anything, and money continues to poor into a failed bank system. I will continue to follow this issue over this next year (surely it will continue to haunt the EU for the foreseeable future), but for now and the next few days I will enjoy the sights, sounds, and tastes of Ireland. Really, Dublin is a beautiful city, and maybe within the next few years they’ll be looking for a budding economist to help out with some of these issues *cough/wink.