Fisher Investments Editorial Staff
Developed Markets

The (Un)Luck of the Irish

By, 11/15/2010

Story Highlights:

  •  Irish economic woes have grabbed headlines in recent days.
  • Ireland's woes stem mostly from the sizable decline in economic growth experienced following the global financial panic.
  • The EU/IMF/ECB backstop is in place, and it affords something more important than just cheaper financing to rollover debt—time.
  • As is typical, the global economy has some weak spots today—but on balance, the world is growing nicely.

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Last week, much attention was paid to Irish woes (not Notre Dame football, but Ireland's economy). Irish yields rose toward May 2010 highs, they have ongoing budget issues, and there are rumors of ongoing bailout talks with the EU. Their attempts at austerity have been a rocky road (austerity is never a political cakewalk), and it could be true that Ireland ultimately is bailed out by the EU. But a default seems unlikely: Ireland has cash in reserve funding them through mid-2011, never mind the €750 billion backstop already in place through 2013 for this exact purpose—large enough to fund Portugal, Greece, Ireland, and Spain's debt for the next three years.

Does this backstop cure all of Ireland's woes? No. The EU/IMF/ECB backstop likely prevents a sovereign default, but it doesn't fix core Irish issues, which are rooted in recent Irish economic experience. The nation, following a sizeable real estate and financial boom, was hit hard during 2008-2009's global recession—shedding nearly 11% of its GDP during the downturn. (By contrast, the US fell roughly 4% peak-to-trough and the UK, 6.2%.) This decline, combined with measures taken to confront banking system problems during the financial panic, have greatly elevated the Irish debt-to-GDP ratio and complicated debt service through reduced tax revenues. Since that time, austerity measures have been implemented—which have come with short-term pain. Ultimately, Ireland's experience during recession was simply far worse than many other parts of the world, and their recovery less robust, principally due to structural concentration in lagging areas.

As we've written before, when assessing global market and economic conditions, it's crucial to weigh positives against negatives. Ireland, while troubled, weighs in at total GDP of $172.5 billion—making it the smallest of the PIIGS. It's about half the size of Greece, which, added to Ireland, constitutes roughly 5% of eurozone GDP. Globally, Irish GDP ranks just ahead of Morocco and a shade behind Finland. For further comparison, if Ireland were a US state, its economic output would be slightly smaller than Connecticut.

While Ireland and the PIIGS (to varying degrees) face ongoing economic challenges, the eurozone continues to grow, fueled in large measure by strong Emerging Markets growth. Led by Germany, France, and Austria, eurozone nations posted Q3 GDP growth of 0.4% (1.5% annualized)—a cooling from Q2's quicker pace, but growth nonetheless. Portugal showed surprising strength with GDP doubling estimates in the quarter. Ireland and the other PIIGS no doubt create a drag, but the rest of the eurozone has proven able to continue growing regardless. Further, global economic growth shows Irish problems are the exception, not the rule.

Not surprisingly, there are stronger and weaker members of the eurozone (and EU for that matter) today. And while some are working through a difficult time, their stronger and much larger members have demonstrated a willingness to stand behind the smaller and weaker member nations. In commentary from the G-20 summit in Seoul, French and German leadership voiced support of Ireland—reiterating the availability of the EU/IMF/ECB backstop if necessary. Importantly, they also noted that private investors would not be required to take haircuts on sovereign debt if the backstop is utilized. Even beyond the bailout, the European Central Bank (ECB) can buy Irish debt on the secondary market—lowering yields, sometimes dramatically. In fact, Irish bond yields shrank dramatically on Friday—possibly influenced by the ECB. The support from more robust eurozone members buys Ireland (and the other PIIGS) something it critically needs: Time to work through recession-driven issues.

 

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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