Pluck of the Irish – A Comeback Story in the Making?
It used to be that Ireland had a bit of an image problem, perhaps not with the rest of the world, but with itself. Irish playwright George Bernard Shaw said, “I showed my appreciation of my native land in the usual Irish way by getting out of it as soon as I possibly could.” For much of the 19th century, following the Great Famine, socioeconomic conditions were such that a culture of emigration took hold in Ireland and its citizenry left in droves for England, the United States, Australia, and Canada. By some measures, this lasted right up into the 20th century, until the Celtic Tiger (a catchy name coined by a Morgan Stanley economist) economy sprang forth and Ireland’s prospects started to look positively dazzling. A number of factors including low corporate taxes, infrastructure upgrades, and education improvement drew businesses (particularly tech companies) to the Emerald Isle.
The new prosperity not only made things better for the average Irish citizen, but even started attracting immigrants from abroad. Incomes rose, unemployment fell…and then in 2001, this economic expansion started to reverse and it appeared that the Celtic Tiger had been declawed. After a bit of a rebound, the global financial crisis struck in 2008 and this cat appeared to have used one more of its nine lives.
However…after some time to lick its wounds, the Tiger is potentially gaining strength. Several factors are combining to make Ireland an attractive investment in my opinion. While Ireland still has a way to go in its recovery, there are several fundamental factors that point toward renewed prosperity.
Ireland was one of the first European Union members to request a bailout; however, it’s shown a tremendous amount of resolve, and has made impressive progress in reducing its deficit, helped by a strong political consensus for fiscal consolidation. Ireland looks likely to meet its deficit target of 8.6% of GDP for 2012, and is committed to a 2013 goal of 7.5%. From my point of view, it looks likely that Ireland will be able to return to the sovereign debt markets for funding some time in 2013, and will likely not require a second bailout. If it should come back to the markets in 2013, it will be eligible for the Outright Monetary Transactions (OMT) program that was designed to allow the ECB to buy up government bonds and help keep their yields down. These lower yields should help stabilize Ireland’s debt-to-GDP ratio.
Another positive for Ireland is that Germany has indicated that once the EU’s banking union is in place, as a unique case, it will have no objections to the European Stability Mechanism (ESM) directly recapitalizing Ireland’s legacy assets – what everyone was calling “toxic assets” a few years ago. This will help get the burdensome bank support off the sovereign balance sheet. Positive news, but don’t expect this before late 2013.
All is not rainbows and shamrocks though; it may become increasingly difficult for Ireland to maintain the required momentum of fiscal consolidation to lower the deficit to 3% of GDP by 2015. Also, Ireland relies on exports, so potential weakness in the United Kingdom and in the rest of the EU is a major risk factor. Ireland will benefit most if everyone else if Europe can continue to keep the wheels on.
From a fundamental perspective, I see several strengths in Ireland’s favor. Although it’s a small European economy, it has restructured itself to become a competitive exporter. It also has a credible austerity plan in place as part of the EU/IMF assistance package, and there is strong investor confidence in Ireland’s successful reform implementation. Ireland also continues to have the lowest rate of corporate taxation in the EU. All told, I don’t think it will struggle to return to the sovereign bond markets.
That said, there are implementation risks ahead. The government’s exposure to the ailing banking sector remains large, the financial environment is still fragile and susceptible to sudden deterioration, property prices are still falling, while the domestic economy remains slow to recover amid high unemployment and subdued trading partner growth. Even so, assuming positive European market sentiment is sustained, my next look at Ireland is likely to be a positive one.