Can Ireland cope with its bank debt burden?

17th August 2012

One direct consequence was the collapse of most of her banking industry which via the too big to fail strategy of her political leadership has saddled her with large debts. A population of some 4.59 million ended up having to provide some 64 billion Euros of bailout money to her banks or just under 14,000 Euros each.

How did this happen?

There is a lot of competition for this title but on the 30th of September 2008 the Irish Finance Minister Brian Lenihan took what is perhaps the worst decision of the credit crunch era. This was recorded by the Financial Times thus.

Ireland's government on Tuesday unveiled a wide-ranging guarantee arrangement to safeguard the deposits and debts at six financial institutions in response to turmoil in the financial markets.

The scheme, which guarantees an estimated €400bn (£315bn, $567bn) of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.

This was supposed to last for two years only but once on such a feed-line the Irish banks were converted into junkies and were always unlikely to be able to wean themselves off it. The poor Irish taxpayer found him/herself supporting junkie zombie banks. Even worse the banks drip fed out more and more bad news until the bailout numbers listed above were reached.

The warped logic of the times even had the Irish government stating that this would protect the taxpayer when it in fact turned out to be the worst decision ever to be taken on their behalf.

The real problem is the debt

Adding the excess financial liabilities of the Irish banking system to the Irish state led to her central government debt ballooning from 47.4 billion Euros in 2007 to an estimated 186.7 billion at the end of 2012. So the direct effect of the bailout was some 46% of the increase and of course there would have been indirect effects too. Put another way without it Ireland would have a central government debt of 122.7 billion Euros at the end of 2012 which would be 77% of her Gross Domestic Product rather than 117.5% of it. Quite a difference to say the least.

Her economy has shrunk

In 2007 Ireland had a GDP of 170.4 billion euros and in 2011 she had one of 158.7 billion Euros. So just as she found debt piling up she was less and less able to support it. If we look at the latest figures we see this.

Preliminary estimates for the first quarter of 2012 show seasonally adjusted volume declines for both GDP (-1.1%) and GNP (-1.3%) compared with the fourth quarter of 2011. However, compared with the same quarter one year ago there were constant price increases in both measures: GDP (+1.2%) and GNP (+0.2%).

Gross National Product

If you wish to see references to GNP you will find them in my past updates on Ireland. Why? Because Ireland has a lot of multinational businesses there who are the equivalent of non-domiciled for a person. Examples are Google and Microsoft and this brought her an estimated 32 billion Euros last year. So GNP is GDP minus this amount which is "net factor income from the rest of the world".

If you wonder why this matters then imagine trying to tax a company which is in Ireland due to its low tax rate. What is likely to happen next? Accordingly when looking at Ireland's ability to finance its public sector deficit GNP does matter and her central government deficit suddenly looks a lot more unsupportable as it is 147% of it.

Unemployment

The unemployment rate has risen from 4.4% in 2007 to 14.8% in July of this year. The last twelve months have seen a slowing and maybe a stop to the rise but so far we have no signs of any reductions.

Retail Sales

The volume of retail sales (i.e. excluding price effects) decreased by 0.7% in June 2012 when compared with May 2012 and there was an annual decrease of 5.5%.

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More on Mindful Money:

How independent is the Bank of England?

Eurozone crisis: The deepening problems for Portugal

Greece wants extra time to implement austerity measures

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