Is Ireland the next Iceland?

Just a few moments ago I caught a very interesting post on Alice Cook’s site UK Bubble. The gist of the post was that things are falling apart in Ireland very quickly. Given what we saw with Iceland, I have to ask: is Ireland next?

I wouldn’t suppose that things are this fragile but we cannot dismiss out of hand talk of Ireland going the way of Iceland. Here is what Alice posted:

Someone left this intriguing comment on one of my posts yesterday:

Alice can you shed any light on what is going on in the Irish Republic?

Last week beef prices collapsed. This week I am unable to sell finished beasts at all.

Last week a police strike in Donegal was narrowly averted when the local authority agreed to stump up accrued overtime.

Bank of Ireland shares are trading for under 90 cents from a one time high of 18 Euro. It looks like the Government’s bluff is about to be called…

Rumour has it that the cashpoint system will stop within 3 days

Can you shed any light?

Is there anyone out there who can help?

Now, Ireland happens to be one of the worst affected bubble economies in Europe. They have seen a massive house price bubble along with huge leverage as their economy leapt forward over the last decade. However, this has all gone pear-shaped in the last year or so and Ireland has a recessionary economy with rising unemployment, collapsing house prices and severe knock-on effects in terms of commercial property. Immigrants, who once flocked to Ireland are no longer coming.

Meanwhile, Ireland was the first country to offer a blanket guarantee to it’s banks’ depositors. I welcomed this move as a necessary step to restore confidence. However, there are two problems associated with it.

  1. As Willem Buiter has pointed out, this move was a “beggar thy neighbour” policy which initially sucked deposits out of British institutions. British savers flocked to government-protected Irish institutions in the UK which courted the British savers with higher interest rates — the government had effectively subsidized the banks. Eventually, Europe as a whole got onside, and sweeping deposit guarantees were offered all around.
  2. The government must be able to credibly back up its guarantee. And this where Ireland looks a lot like Iceland. The country has an outsized financial sector which could not possibly guaranteed by the Irish government. Moreover, Ireland is a member of the Eurozone — meaning it can’t print its own money. The UK, which borrows in sterling can at least print money to finance any guarantees. The Irish are constrained — and, therefore, vulnerable.

It remains to be seen whether there is a sub-current of panic about the fragile Irish banking system that could lead it to Iceland’s fate. In fact, commentators like Wolfgang Munchau have argued that the single currency is a boon to the likes of Ireland because it prevents currency attacks like the one Iceland suffered, leading to its downfall.

However, a run on Irish banks is what would ultimately bring the Irish down. After all, it is the Government bank guarantee which creates the vulnerability. The Irish Government needs to make some contingency planning because an Icelandic fate is not out of the question. It need not worry about a currency run, but a bank run is still possible.

There are two ways to skin a cat.

Sources Ireland – what is going on? – UK Bubble Why the British may decide to love the euro – Wolfgang Munchau, FT The Irish solution: unlawful, beggar-thy-neighbour and short sighted, but apart from that OK – Willem Buiter, FT Mavercon Iceland, Switzerland, Denmark, Sweden, Jordan and countries with banks that are too big to bail out – Bronte Capital The first casualty of the crisis: Iceland – VoxEU Stunned Icelanders Struggle After Economy’s Fall – NYTimes.com


Originally published at Credit Writedowns and reproduced here with the author’s permission.

5 Responses to "Is Ireland the next Iceland?"

  1. Interested party   November 19, 2008 at 8:04 am

    I don’t think things are as bad as Alice was making out.I’d be very surprised if the cash points went down and the below report from this morning highlights this. As for the strike in Donegal. I work in the media up here and there was no mention of it so think it’s a tad exaggerated. Even if there was talk of action being taken, I believe it would have drifted out into the public forum. Things aren’t that confidential around these parts!”Mr Cowen said he had received a report from PricewaterhouseCoopers which says the six banks covered by the State guarantee scheme had more capital than required by the regulator on September 30 when the scheme was announced. The report also said the banks would have enough capital until 2011.But the Taoiseach said market requirements had changed and that the banks were looking at raising private capital.”

  2. Anonymous   November 19, 2008 at 8:45 am

    Don’t see the doomsday scenario. While economic developments have indeed turned downwards, the economy is one of the most flexible and energetic in Europe. It has relatively low debt, at least at this stage, and thus can weather the storm. The adjustment in property prices is taking place while the Government has taken steps to moderate the impact on the fiscal position. All in all the indicators point to a well-managed economy.

    • Anonymous   November 20, 2008 at 7:56 pm

      Well, keep in mind that Iceland has been an exceptionally flexible economy and for a while it was considered more energetic than most of Europe. Iceland’s sovereign debt was not relatively low, it was practically nil a couple of months ago. The adjustment in property prices started last winter and most of the indicators seemed fine. So don’t assume anything about the robustness of the Irish economy.

  3. Anonymous   November 19, 2008 at 11:09 pm

    The ISEQ – 20 (Irish: ^IETP)maybe reached 1590 in the first half of ’07. It closed yesterday at 365, down 77% from it’s high. Ummm….maybe doomsday, maybe not, but looks worse than many other markets.

  4. Diarmuid   November 22, 2008 at 7:27 am

    I would be wary about quoting from an anonymous poster to a 3rd party blog. Some facts:- Irish police (the gardaí) are paid directly by the Irish government, not any local authority so the claim of a strike threat is off the wall.- “Last week beef prices collapsed. This week I am unable to sell finished beasts at all.” I don’t know what this is supposed to mean, but I live in Ireland and we still eat beef for dinner. The price is subsidised by very generous EU grants in any case.- “Cashpoint system will stop in 3 days”. Ok, I have to go now (must get my cash out of the machines before the system collapses tonight!)On comparing Iceland & Ireland – Irish banks are way overexposed to property and will suffer losses on this, but they are in no way as bad a state as in Iceland. Euro membership guarantees us low interest rates and far better access to liquidity.I thought this article might provide some insight into the problems Ireland is facing, hopefully you’ll do a bit more research and speak to some people involved in the Irish economy and address the topic again.