“A Guarantee Too Far”
Currently the Irish economy is in freefall following the collapse of the real estate market that had expanded ten fold in the decade from 1997 – 2007. The reasons for this “Celtic Tiger” boom are many but in the main it arose due to the following:
- Ireland’s entry into the Euro allowed Irish banks access to unparalleled pools of cheap credit.
- Ireland then had a low cost base.
- Ireland had an unusually well educated workforce.
- The integration of Europe brought many foreign companies to Ireland.
- We introduced a most favourable corporate tax structure for international transfer pricing.
- Wage rates rose at unprecedented levels due to job growth and a new liberal taxation policy.
- The “originate to distribute” banking model increased banking liquidity to unprecedented levels.
- “Social Partnership” brought industrial peace after many decades of instability.
- The Northern Ireland “troubles” were finally resolved and the country had true peace which had eluded it for over four decades. These troubles had artificially repressed the country financially. The arrival of peace engendered a new positive attitude and an economic outburst.
Due to a lack of government regulatory control and strategic foresight taxes from an unsustainable property base were used to fund a bureaucracy that is now overpaid and over extended and is in severe danger of bankrupting the country for generations. As with many western democracies the executive system is proving incapable of making the tough choices necessary to stabilise the destructive spiral of debt interest compounding on debt principal.
However, apart from the reality of supporting a burgeoning government and semi-state bureaucracy, the Irish government made a particularly disastrous mistake in the autumn of 2008 when the financial catastrophe first broke. In a mid-night crisis meeting, at Farmleigh (the former mansion of the Guinness family which now serves as a luxury bolt-hole for Irish elites) the department of finance cajoled the ruling Fianna Fail party in power into not only guaranteeing banking deposits but also guaranteeing all bank bondholders. Thus far, two years on, for one lone particular financial institution called “Anglo Irish Bank,” the bill for this “guarantee too far” is now 36 billion Euros and rising. No other government in Christendom has provided such a windfall to the privileged bondholder elite. Under this guarantee as bonds mature the holders are being paid off, in full, instead of for cents on the dollar. As long as this guarantee remains in place the country will continue to be fleeced. As a result of this largess the price on Irish government borrowings has rocketed to 6.6% almost twice the German bund rate. This situation is making a mockery of the concept of a “common Euro currency”. Increasingly the Euro is being seen as an exchange rate mechanism rather than as a true currency.
As with Portugal and Greece in Ireland the economic situation on the ground is becoming desperate. The main banks are basically insolvent and unable to lend. Capital expenditure by the government departments has stagnated. Taxes are rising to pay for the bloated interest charge on ballooning foreign borrowings. Business cash flow has collapsed and credit is non existent. Many enterprises now no longer accept cheques and insist on cash or payment through credit or debit cards. Money has become very scarce. It is the greatest crisis the country has faced since the 1921 Irish War of Independence. Unfortunately the media has failed to highlight this reality and many politicians and banking executives act as if this crisis is just a normal credit cycle event. They actually believe that soon Ireland will return to the boom years. They plead that all we have to do is wait the situation out. This type of complacency is preventing party leaders from taking the radical actions necessary and as each month passes the government borrows an additional 2.6 billion just to fund day to day expenses. Soon government borrowings will be over 100% of GDP and with exploding interest charges, increasingly taxes are simply being used to pay off foreign bondholders. Increased taxes are contracting the economy further and so the death spiral of debt is squeezing the life out of day to day commerce. Business is collapsing under a deflationary depression while bureaucracy is being sustained through misguided political policy. Ireland has become a socialist nightmare over-night.
What Ireland now faces is a highly competitive, low cost, low credit, web-interconnected, transnational and level-taxation based environment. Ireland must grow up and move on. It is time for fresh ideas and fresh action. It is time for leadership, courage and vision. It is time for affective sound bites to be replaced by effective strategic and tactical practicality. Hopefully the Irish people will wake up from their consensus trance and force the political elite to stop bailing out corrupt banking institutions and start to cut its public expenditure budgets. Enterprise not bureaucracy must be championed and its educated young workforce given hope rather than an emigration ticket. Whether this wake-up call will be headed is anybody’s guess. Increasingly the trend in Euroland is for Brussels to call the shots over local “sovereign” parliaments. In this crisis this development has turned out not to be beneficial. Local politicians have thus opted to pass the buck rather than courageously face up to the challenges.
However, in Ireland it would appear an end game is shaping up. There is a limit to the level of borrowing the country can run up particularly with exploding interest costs. Should the Irish political system continue to prove itself incapable of restructuring its bloated public service expenditure it is inevitable that at some stage the IMF, probably through the auspices of the European Central Bank, will wade in and directly instruct the Irish Department of Finance to act. From my point of view the sooner this happens the better because it is only then that people will realise that the bottom is in. It is then and only then that confidence will be restored to the wonderful Emerald Isle.
By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.
Mr. Quigley was born in 1958 in Dublin and holds a Batchelor Degree in Accounting and Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in 1989. in Belmont, California where he lived for 6 years. He developed the Wealthbuilder investment and trading course over the last decade as a result of research, study, experience and successful application. This course marries Fundamental Analysis with Technical Analysis and focuses on 3 specific approaches. Namely: Momentum, Value and Pension Strategies.
Mr. Quigley is now based in Dublin, Ireland and Tampa Bay, Florida.
© 2010 Copyright Christopher M. Quigley - All Rights Reserved
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