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Ireland’s Banking and Economic Crisis: Toxic Loans Surpass Estimate of Irish Government

March 31st, 2010 Comments off

Prior to Greece becoming the economic and financial basket case of Europe, it was Ireland that held that  dubious distinction. For when the global economic and financial crisis detonated with full fury in the fall of 2008, Ireland’s own version of the real estate asset bubble imploded, transforming the balance sheets of the nation’s major banks into a toxic waste dump.

As with  America and the UK, Irish politicians informed their nation’s citizens that the big banks must not be allowed to fail, and therefore the taxpayers would pay for the egregious financial miscalculations of the high-priced “talent” that led these Irish  financial institutions into the abyss. While the United States came up with its TARP taxpayers bailout, Ireland formulated its own unique response, the so-called NAMA, the acronym for National Asset Management Agency. NAMA was, in effect, a “bad bank,” which would take the toxic assets off the balance sheets of Ireland’s large banks, in particular the Anglo Irish bank, in return for sovereign bonds. The expectation was that Irish taxpayers would have to accept large losses, but in return the nation’s banks would return to fiscal health, and be able to resume normal patterns of credit and loan creation.

The “bad bank” approach had many critics, appalled that taxpayers money was being used to backstop  private sector losses, in exchange for vague promises by politicians that the end result would be therapeutic for the national economy’s ills. No less an authority than Joseph Stiglitz, Nobel prize winning economist, expressed great scepticism over the efficacy of Dublin’s taxpayer funded bank bailout. Onward with the “bad bank” concept the government proceeded, anyways, oblivious to its critics.

Now the Irish political leadership has informed its sombre citizenry that the banking crisis was far worse than first believed. When NAMA was first established, the authorities believed that the toxic loans being acquired for the “bad bank” would need to be discounted by 30%. Now, an embarrassed government concedes, the actual discount of these toxic loans are coming in at a far worse level, a miserable 47%. Ireland’s beleaguered Finance Minister, Brian Lenihan, has stated that the Anglo Irish bank alone would be receiving from the taxpayers €8.3 billion in just the coming week, with a strong possibility that an additional €10 billion would almost certainly be required to cover anticipated losses at Anglo Irish Bank. All told, it is now being declared by Dublin that toxic loans by Ireland’s banks may cost taxpayers  a staggering €32 billion, equal to more than $43 billion at the current exchange rate. Considering that Ireland has a population of 6.2 million, this reflects a charge of nearly $7000 for every Irish man, woman and child towards the cost of bailing out financial institutions that, in the words of Finance Minister Lenihan, “played fast and loose” with Ireland’s national economy.

Ireland’s Economy In Free Fall Collapse

April 12th, 2009 Comments off
Once known as the “Celtic Tiger” for its sustained record of double-digit economic growth, Ireland is now in the midst of a financial tsunami. Unemployment is soaring, economic activity is contracting, banks are over-loaded on toxic assets and government spending is out of control. In many ways, Ireland seems to be a microcosm of the United States, only with a Gaelic accent. However, sheer size and the status of the U.S. dollar as the world’s reserve currency has delayed the full replication of what Ireland is currently experiencing. For that reason, what is occurring to the Irish economy in the present may be a window of what might soon lie ahead for the United States.
The strength of Ireland’s economy during its glory years was largely based on the seeming success of the globalization economic model. International businesses, especially in the high technology sphere, set up shop on the Emerald Isle, taking advantage of a well educated, cost-competitive workforce in close proximity to the European mainland, and an economy fully integrated into the Eurozone. This globalized corporate presence ended the historic migration of Irish workers overseas, as the local economy’s demands even drew immigrants from Eastern Europe into Ireland. The increase in domestic opportunities contributed to a massive explosion in property prices. Irish banks bet heavily on securitized assets, as the financial sector assumed a leading role in the Irish economy. This is a scenario we have seen elsewhere, and led to Ireland being especially vulnerable to the consequences of the Global Economic Crisis.
Since the onset of the synchronized global recession, the Irish economy has undergone a rapid contraction, erasing almost overnight the economic gains of the past several years. Unemployment in the Irish republic stands at near 11%, and is likely to get much worse. According to Ireland’s Central Statistics Office, the nation’s GDP shrank by 7.5% in Q4 of 2008. Added to these grim numbers hangs the dismal situation characterizing Irish banking and financial institutions; approximately $110 billion of toxic assets are eroding their balance sheets.
The Irish Taoiseach, Brian Cowen, has reacted with desperation. Recently, his government unveiled a second emergency budget. Ireland’s finance minister, Brian Lenihan, submitted a spending plan that contained a smorgasbord of selective tax increases and spending cuts. These steps were taken in recognition of the dual emergency facing the Irish economy. The once “Celtic Tiger” is not only incurring massive unemployment and social distress; the collapse in revenues has driven the nation’s budget deficit through the roof. The steps proposed by Lenihan sought to reduce the government’s budget deficit from nearly 14% to about 10.75% of GDP. These steps were not nearly enough to comfort the worried rating agencies. Standard and Poor’s has removed Ireland’s coveted AAA rating, while Moody’s downgraded all 12 Irish banks.

With expenditures of 55 billion euros and revenues falling below 35 billion euros, Ireland is facing the daunting paradox confronting a growing host of nations, including the United States. The politicians maintain they cannot implement draconian spending cuts in the face of severe human hardships being created by the Global Economic Crisis. Yet, mathematical realities may constrict the ability of political leaders to infinitely borrow money in order to maintain high structural deficits. With the rating agencies having made their move, the ability of Ireland to finance its deficits through the largess of the global credit market will become increasingly more problematic. It appears that the IMF may be the ultimate lender of last resort for Ireland, and that kind of assistance will impose costs of its own.

The economic catastrophe facing Ireland will cause sorrows that cannot be suppressed by a pint of Guiness. Nothing less than national insolvency threatens this once robust economy. And lest the United States pretend that the economic collapse now underway in Ireland is irrelevant to its own situation, the elements that have brought down the “Celtic Tiger” are almost identical to those now eating away at the very foundation of the U.S. economy.

 

 

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