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 Post subject: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 12:52 am 
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http://www.themalaysianinsider.com/inde ... y-the-euro
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LONDON, April 26 — When 20 government ministers resign en masse, it usually denotes a political crisis or a pre-electoral technicality. When they do so because you can’t afford to pay all of them, you know you are in serious financial trouble.

Ireland is so broke that it is cutting back on government.

It was a rare stunt last week that saw 20 junior ministers all step down at midnight on Tuesday so that the prime minister, Brian Cowen, could decide how many could affordably be retained. (The answer: 15).

The savings are, of course, a drop in the ocean of debt and deficit currently washing across the island. If anything, this was a gesture of solidarity to a public that has seen boom turn to spectacular bust in the space of a few short months.

“Whatever savings are made is very small beer compared to the whole of public finances,” notes Bank of Ireland economist Michael Crowley. “The government is trying to send out a signal that the ministers are doing their bit.”

Is Ireland another Iceland? Certainly the government has, in recent weeks, been furiously trying to demonstrate that it is not as financially ruined as its North Atlantic counterpart, that although the two countries have a lot of letters in common, the similarities stop there.

The problem is that the similarities don’t stop there. Ireland, like Iceland, was far too cavalier in the boom years. Cheap money fostered a culture of debt. Reckless lending nourished a housing boom, such that the banking sector and its great sack of debt perched precariously on the real economy like a bloated clown on a tiny unicycle.

When the credit crunch swept the world, loans turned sour and the banking system all but imploded. As in Britain and the United States — and Iceland, for that matter — the state had to step in to prevent an outright collapse.

But Ireland does differ from Iceland in crucial ways, chief among them is its currency. Ironically, the country that has twice confounded its European partners with rejectionist “no” votes can now thank the European Union for the currency that has sheltered it from the storm.

When Iceland’s economy imploded last autumn, the currency collapsed, compounding the crisis and sending even the brave and foolhardy running for the exits. Ireland’s decline has been different.

“Membership (of the euro) helped rather than hindered,” says Crowley. “If we had been outside the euro during the crisis, we would have had a number of difficulties. We would have had a very sharp fall in currency.”

Peter Schaffrik, a fixed-income expert at Dresdner Kleinwort in London, adds: “It actually benefited them a great deal”. Without the euro in Ireland, “people would have pulled their money out because currencies are way more volatile than bond prices. On bonds, you would have lost about 10 per cent, whereas on currency, you would have lost a multiple of that”.

Nonetheless, the prognosis for Ireland is sobering. Gross domestic product (GDP) is forecast to fall by seven per cent this year. The budget deficit is set to soar to more than 12 per cent of GDP.

Unemployment hit 11 per cent last month — the highest level since 1996 — and is forecast to soar to as high as 15 per cent next year. No wonder the government feels the need to make a gesture.

Unlike bigger countries which can essay fiscal stimulus packages confident that they will not be punished by investors, Ireland had few choices earlier this month but to tighten the belt in a way not seen for decades.

An austerity package — which followed two previous attempts to cut costs and restore equilibrium to public finances — cut benefits and imposed new taxes in an effort to save €3.5 billion (RM16.37 billion).

Will it work? Or will Ireland become the first euro-zone country to go bust? The answer will depend on three principal factors: The debt market, the euro space and the global economy.

The most obvious signal of a state going bust is when it can’t refinance its debts. Downgraded by credit rating agencies, Ireland already has to pay a premium over other more robust euro-zone countries like Germany and France when it borrows. The state will have to borrow, moreover, as tax revenues shrink in the recession.

But there are several buts. Ireland’s debt level was relatively low coming into this crisis (debt interest repayments were less than one per cent of GDP last year, at €1.5 billion).

It has already managed to raise substantial funds on debt markets. There are no major refinancing dates looming. And the government has already shown it is willing to take painful measures to prevail.

“There are reasonable people who think there is a risk of default, but I am more optimistic,” says Professor Karl Whelan of University College, Dublin. He says the cost of bailing out banks has been large. “But three (fiscal) packages in eight months show they haven’t been scared to address fiscal problems.”

Secondly, the euro space is something of a double-edged sword. The currency that gave Ireland backbone throughout the credit crunch is now something of a straitjacket: Britain, for example, is starting to benefit mildly from a sharp decrease in the value of the pound, making its exports more competitive.

Ireland is shackled to one of the strongest global currencies, the euro. Competitive devaluation is not on the cards. But the euro zone remains a strength too: As a defaulting country would shake the currency like never before, the authorities in the 16-nation zone have made it clear that there will be some kind of support mechanism to help a teetering member state.

So, Ireland looks like it will muddle through. But whether and when the Celtic Tiger will roar again is a different question. The International Monetary Fund said last week the recession would be “particularly severe”

in Ireland. Economists say much will depend on the global economy — Ireland won’t resurrect itself on its own.

“The prospects for recovery in 2010 at the earliest are the best hope,” says Whelan. — Straits Times


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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 1:05 am 
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Dreaded_Estate wrote:
Bank of Ireland economist Michael Crowley


WTF ???? :shock:

Where is Bank of Ireland economist Dan McLaughlin in our hour of need ....or Austin Hughes . Are they not our foul weather friends too ??

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 1:11 am 
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2Pack wrote:
Dreaded_Estate wrote:
Bank of Ireland economist Michael Crowley


WTF ???? :shock:

Where is Bank of Ireland economist Dan McLaughlin in our hour of need ....or Austin Hughes . Are they not our foul weather friends too ??


Dr Dan is more of a domestic economist. Even BOI knew the world just wasn't ready for Dan's economics 101.


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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 1:47 am 
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But surely the lowly Malaysians would be truly impressed at the opinions of a CHIEF Economist rather than one of his minions . They deserve to be treated properly by BoI who seem to have sent the receptionist out to talk to them .

Michael is a Senior Economist ( for domestic consumption anyway) and not an Economist .

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 1:48 am 
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It's true though.

The € is the reason the liquidator has not been appointed. I'm happy with that, and will vote accordingly. And so will the Nation.

In a generation, Ireland will be a case study in how not to run an economy. The lessons in economics and politics will be well understood for another generation. The process will begin again then, and asset price bubbles will re-emerge to a new willing populace. Education is our only hope and defence.

Germany will also be a study in economics, and if you substitute the word 'export' for 'property' they'll read similarly.

The debate may, after all, have nothing to do with Capitalism, Socialism, Communism, Fascism, Bolloxism, LaissezFaireism, Gombeenism. It's about human behaviour, and how we regulate / control same. Which is badly. That's where we need to focus our attention.

Answers on a postcard ...

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 2:36 am 
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I've noticed that the insane chatter about leaving the Euro that was floating in the ether a few months ago has largely disappeared.


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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 4:00 am 
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Larry wrote:
I've noticed that the insane chatter about leaving the Euro that was floating in the ether a few months ago has largely disappeared.


No, I'm still here...

Just waiting for the end of 3Q 2009...that is when the real fun will start if anything is going to happen this time around. Still think that there is a 30% probability that there will be a major ERM style meltdown of the Euro before all the rubble has settled.

Not that the other 70% scenarios are any more palatable....

Hello ushinawareta jūnen, euro style..


http://en.wikipedia.org/wiki/Japanese_asset_price_bubble


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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 12:16 pm 
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one could argue that we wouldnt be in this mess if we stayed out of the euro, mainly because we had super low interest rates for so long XD

who knows what could have happened if we stayed out of the euro. with the punt, we had high interest rates, therefore we could have become 'Iceland' if we became the deposit account of choice in the carry trade dealings. no doubt our esteemed banks would have facilitated this very move.

While I dont agree with the Malasyian article because we could only have pulled the finacial chicanery by being in the euro, the political will (enforced regulation) was not there to have stopped the banks from participating in the potential 'carry trade' .

needless to say, our 'competetivness' would have gone up with a devaluation of the currency.

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 12:50 pm 
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You beat me to it thingfish,I would argue the Euro destroyed Ireland,as without it the property bubble would never have happened,perhaps someone can help list the benefits of having the euro - apart from the bubble and the bankruptcy of the banking system and its government?

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 12:59 pm 
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PROFESSORI wrote:
You beat me to it thingfish,I would argue the Euro destroyed Ireland,as without it the property bubble would never have happened,perhaps someone can help list the benefits of having the euro - apart from the bubble and the bankruptcy of the banking system and its government?


Like it didn't happen in the UK or Iceland with their independent currencies? Gimme a break! :roll:

The western world was sloshing with cheap credit - being outside the euro we'd have had a similar bubble, maybe not as high, but we'd be in even bigger doo-dah right now.

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 1:09 pm 
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FF used every means at their disposal to overprime the economy and make for a feel-good factor in advance of the last elections.
increasing old age pensions, medical cards for all, increasing social welfare. adding thousands of jobs in the public sector.
The Regulator has been shown to have been working toward the wishes of the builder's party. Enforce salary multiples for mortgages, query book-keeping in Anglo - not on your nelly.
Imagine if FF had an "at arms length" total control of monetary policy courtesy of the no so independent Central Bank/Financial Regulator.


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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 1:34 pm 
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Quote:
its great sack of debt perched precariously on the real economy like a bloated clown on a tiny unicycle


Am I the only one who read that and had a flashback to those naked Clowen pictures.

-Rd

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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Mon Apr 27, 2009 7:35 pm 
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dipole wrote:
FF used every means at their disposal to overprime the economy and make for a feel-good factor in advance of the last elections.
increasing old age pensions, medical cards for all, increasing social welfare. adding thousands of jobs in the public sector.
The Regulator has been shown to have been working toward the wishes of the builder's party. Enforce salary multiples for mortgages, query book-keeping in Anglo - not on your nelly.
Imagine if FF had an "at arms length" total control of monetary policy courtesy of the no so independent Central Bank/Financial Regulator.

Indeed.

Anyone that argues that the irish government would have calmed the boom if they had more control seems to miss the obvious fact that they used every tool available to stoke it. Keynesian counter-cyclical policies anyone - not FF, that's for sure.

Back when the celtic paper tiger looked real (i.e markets were stupid), irish interest rates would have tracked euro rates, now they'd be another factor killing the economy (as would the unavoidable currency collapse).


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 Post subject: Re: Ireland: Saved by the euro
PostPosted: Thu Apr 30, 2009 9:55 am 
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FT's Brussels bureau chief links to the pin (this topic) in the 1st paragraph of his recent blog article.....

http://blogs.ft.com/brusselsblog/


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