Ireland needs a miracle
Iceland’s deficit has been helped by thermal energy and aluminium smelting, Ireland has nothing like
In 2005 and 2006, while working for a Mayfair-based hedge fund investing in asset-backed securities, I made regular trips to Dublin. I never spent the night. The Dublin day trip became part of my working week during those boom years: a dawn flight from the tatty domestic limb appended to Heathrow's Terminal One, a limo to the dramatic futurist development that is Dublin docks, a day spent in meetings at the Irish Financial Services Centre, then back in London for a late dinner.
I never saw Dublin proper, and most of the people I met weren't Irish: the Belgian-French financial group Dexia's fund management arm was based there, as were those of the German banks Depfa and Landesbank Baden-Württemberg. Even the Irish banks I had meetings with were owned by foreigners: ACC is a subsidiary of the Dutch bank Rabobank, IIB part of the Belgian bank KBC, National Irish Bank belongs to Danske. The speed with which these foreign institutions seized upon the myth of the Celtic Tiger and the fleeting nature of my trips there gave everything a sense of impermanence.
Ireland now embodies much of what went wrong with the world in the first years of this century: a bloated financial-services system, a hyper-inflated property bubble in both commercial and residential markets, banks that were under-regulated and far too reliant on short-term funding, high levels of consumer debt and a government that took a number of poor decisions in the early days of the crash. Greece was in many ways an exceptional European crisis - much more like an emerging-market sovereign default. The Irish model will be the example for future busts.
For a brief period, in the years leading up to the crash, Ireland was at the cutting edge of financial services. Dublin had a near-monopoly on the European securitisation market - from collateralised debt obligations (CDOs) to the special purpose vehicles (SPVs) through which mortgage-backed securities (MBSs) were issued (usually backed by home loans from the UK or Germany, rarely from Ireland). Dublin was able to provide the lawyers to structure transactions and the non-executive directors to sit on the SPVs' boards. The securities would then be listed on the Dublin Stock Exchange.
The Irish banks were major investors in these asset-backed securities and deals were often managed by Dublin-based fund managers. All of this occurred against the backdrop of an unobtrusive regulator and very low corporate tax rates. Even better, Ireland does not enforce "controlled foreign companies" regulation - anti-avoidance rules for foreign profits - making it simpler for investors to shift profits from one tax jurisdiction to another. This is why, as well as banks, firms from WPP to Shire Pharmaceuticals to Google moved their HQs to Dublin.
A joke went round the trading floors in September when the Irish government was forced to nationalise Anglo Irish Bank: "What's the difference between the banking systems of Ireland and Iceland? One letter and two years." At first glance, the comparison looks spot-on. In both countries, the banking system swiftly grew to dominate more traditional industries (in Iceland, fishing; in Ireland, agriculture). And both systems were founded upon the twin pillars of rampant speculation and lax regulation.
Iceland is now in better shape than anyone would have predicted in the dark days of 2008. The budget deficit is some ten billion kronur less than forecast and fishing has been augmented by geothermal energy and aluminium smelting to make up for the loss of financial services income. Most important, the country's rise from the ashes has been helped significantly by the devaluation of the krona in the wake of the crisis. This has helped spur foreign investment and the return of tourists to Reykjavik. Ireland doesn't have that option, and the foolhardy attempt of the government to underwrite the debts of its banks in 2009 ensured a budget deficit of almost 32 per cent of GDP.
The markets haven't been impressed by the bailout. After a brief rally, the euro gave up most of its gains as details of the joint EU/IMF rescue plan emerged on 22 November. Shares across the world fell as analysts predicted that Ireland would not be the last European sovereign to go cap in hand to the EU. The Irish stock market sank almost 1.5 per cent. Moody's stated that it would likely downgrade Ireland's current Aa2 rating by several notches. Credit default swap (CDS) spreads on both the sovereign and the leading banks all widened as speculators gambled that the package would not be enough to save the nation's bankrupt financial system. To insure €1m (£850,000) of Allied Irish Bank bonds with a CDS contract currently costs a staggering €550,000, up from €80,000 in August. Rumours circulated that the banks would be merged, or broken up and sold off; whichever, it was clear that Irish banks would be smaller and humbler than before the crash.
Those bull-market market day trips to Dublin seem like a distant dream. Even if, as seems to be the case, Ireland maintains the lowest corporate tax rate in Europe - 12.5 per cent - companies are likely to pull out of an economy on the brink of meltdown. Some estimates of the final cost of the bailout have now topped €200bn - and this is in addition to the €50-70bn the Irish government has already spent propping up its beleaguered banks. W B Yeats has been quoted by every financial hack trying to lend gravitas to their analysis of the Irish crisis. You can see why - things are falling apart. But I'll call on a less apocalyptic voice, Seamus Heaney, who urged us to: "Believe in miracles/and cures and healing wells." God knows, Ireland needs them.
Alex Preston's column appears fortnightly. His novel "This Bleeding City" is published by Faber & Faber (£12.99)