Trouble looms in Ireland after debt cut two notches and deficits soar

Submitted by Edward Harrison of Credit Writedowns

I am posting this in the interest of widening the discussion at Naked Capitalism to include some topics in Europe.

Fitch, the credit rating agency, has just downgraded the sovereign debt ratings for the Republic of Ireland from AA+ to AA-.  That is two notches and is proof-positive that the ratings agencies are worried about the hole in Dublin’s finances.

If you read the Irish press this morning, it is all doom and gloom and has a lot to do with the banks and budget deficit.  It is not just about the ratings downgrades.

The EU has just released figures putting in doubt Ireland’s rosy scenario for cutting budget deficits.

The Irish Independent says:

Next month’s Budget may set the economy back further, but without it the country’s national debt could reach 100pc of output (GDP) by 2011, the EU Commission has said in a new analysis.

The Commission is forecasting a decline of 1.4pc in Irish GDP next year. But Brussels is not taking the impact of next month’s Budget into account, because the details are not yet known.

“Depending on the specific measures that are eventually implemented, a dampening effect on consumer demand cannot be excluded,” the Commission says in its autumn economic forecast.


On the other hand, it says that faster correction of the economy’s problems might give more support to consumption and investment by helping confidence.

The Government’s plans include a correction of 4.3pc of GDP — around €8bn — in the Budgets for 2010 and 2011.

Unless there is a compensating boost from confidence, this could also reduce the modest 2.6pc growth forecast for 2011.

These forecasts are higher than those in the Commission’s estimates last May, but it warns of the struggle facing the Irish economy in trying to return to strong growth.

Another top headline in the Irish Independent has the OECD warning that the Irish government should not rule out nationalising banks in addition to its bad bank programme, NAMA.

The Government shouldn’t rule out temporarily nationalising the country’s banks as they may require more capital to cushion against surging bad debts, the Organisation for Economic Cooperation and Development said.

The Government is setting up the so-called bad bank that will buy €77bn of property loans from banks at a discount of 30pc. Losses on those assets may leave the lenders needing extra capital.

“Further recapitalisation may be necessary as assets are being purchased below book value,” the Paris-based OECD said in a report today. “Temporary nationalisation would have a number of drawbacks, but it should not be ruled out altogether.”

The Government has already guaranteed all deposits at banks and some of their debts, pumped €7bn into Allied Irish Banks and Bank of Ireland and seized Anglo Irish Bank.

“Substantial” banking losses are likely to be met by the taxpayer and nationalisation should only be undertaken with the “utmost reluctance,” the OECD said.

The FT’s Stacy-Marie Ishmael has a piece out doubting the maths used in NAMA, which bolsters the OECD view that the bad bank may not be enough.

So you have a trifecta of bad news coming out of Ireland: a two-notch downgrade by a major ratings agency, a warning from the EU that the economy will be weak for sometime to come and that deficits targets will not be met, and another warning from the OECD that the banking situation in Ireland is still very grave.

Quite frankly, it is not looking good for an Irish recovery at this time without the help of the IMF. This all brings me back to my question one year ago: Is Ireland the next Iceland? They will be if the EU, IMF and Irish government do not take today’s bad news seriously and take drastic action to bolster the Irish banks, economy, and government finances.

Who said the financial crisis was over? It is not.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Timbo614

    I heard a (Prophetic?) joke from an Icelander 6 months ago:

    Q: What is the difference between Iceland and Ireland?

    A: One letter and 6 months.

  2. Kieran

    Ireland can’t be Iceland, because it’s part of the EuroZone, and it can’t devalue its currency or raise local interest rates, because it has no real control over such things. This isn’t to say it’s not in deep doo doo, only to say that the manifestation of its deep doo doo will likely be very different from Iceland’s.

  3. sean

    You understimate the problems facing us in Ireland.
    Currently unemployment is 12.5%.
    Social welfare accounts for 35% of all government expenditure for 2009.
    A two parent ,two child family on social welfare are entitled to collect in excess of 37,000 euros tax free.(‘McCarthy An Bord Snip’ report published recently).
    The average industrial wage is 32,000 euros which is taxed ensuring there is little incentive to work when those on social welfare are far better off.There is now a thriving black economy.
    All immigrants to Ireland are entiltled to social welfare (including illegal immigrants;for example the IBC/05 scheme allowed approximately 100,000 illegal immigrants remain in Ireland without amnesty if they signed a form stating they were illegal immigrants.)
    Almost 20% of unemployment claims are by immigrants.

    The Public Sector wage bill and social welfare costs make up two thirds of expenditure.The rest is used to run public services.

    The country is in a deflationary spiral with the supply of money decreasing steadily.The residential property market has collapsed and price declines of 50% are the norm.Information gathered on real estate listings clearly show price declines are far worse than reported in the media.
    NAMA which is the vehicle being set up to bail out commercial property developers and the Irish banks is in most peoples view straightforward theft of taxpayers money.
    Its stated purpose is to recapitalise the banks and deliver renewed lending to small businesses.However the banks are insolvent and the amounts being transferred into the banks are not enough.They remain Zombie banks.
    Also because the EU is precluded from straightforward quantative easing ,they have developed a form of it by creative use of the Maastricht Treaty Protocols which allows sovereign Irish Bonds to be purchased by Irish Zombie banks .These bonds are then repo’d at the ECB for extremely low rates ,this gives the banks an interest on the bonds of about 4.5%.
    Given that deflation is around minus 6.5% in Ireland right now, the real rate of interest gains for the banks are 11% paid for by Irish taxpayers,
    There is therefore no investment lending to small business which could give such a great return at zero risk.The notion that banks will lend if recapitalised is delusional.

    There are other serious structural flaws such as a tax base dependent on transactional taxes which have collapsed ,the fact that 50% of workers pay no income tax and that VAT is higher than in Northern Ireland and the UK ensuring a massive cross border flow of people purchasing goods.

    None of the above can describe the anger and extreme resentment bubbling below the surface of the population.It is difficult to see how civil conflict will be avoided in the coming year.

    1. ndk

      A two parent ,two child family on social welfare are entitled to collect in excess of 37,000 euros tax free.(’McCarthy An Bord Snip’ report published recently).
      The average industrial wage is 32,000 euros which is taxed ensuring there is little incentive to work when those on social welfare are far better off.There is now a thriving black economy.

      Good Lord. That’s stunning. You guys really are very deeply misaligned, far beyond what headline figures could ever reveal.

      Either of those incomes is higher than the median income in the States, but as bad as things are here, we’re not that severely dependent on government hand-outs just yet. Thank you, visitor from Future World, for revealing what I have to look forward to.

    2. Vinny G.

      You wrote: “All immigrants to Ireland are entiltled to social welfare (including illegal immigrants;for example the IBC/05 scheme allowed approximately 100,000 illegal immigrants remain in Ireland without amnesty if they signed a form stating they were illegal immigrants.) Almost 20% of unemployment claims are by immigrants.

      There we go again, sliding down that same stupid European slope of hate and blame of the immigrants for problems that you have only yourselves to blame for. No offense meant to you personally, but there is so much stupidity and ignorance in what you wrote, I would not even know where to begin to debunk it. However, I will address a few of your most offensive remarks.

      First, I presume that those 20% of unemployment claims made by immigrants, as you say, are done by people who worked in Ireland legally, contributed toward Irish unemployment insurance, and thus are entitled to collect unemployment benefits when they lost their jobs. Am I correct in that sir? Or is it somehow, in your twisted mind, okay to deny them that simply based on the fact that they were born in lands other than your proud, drunken, and not-so-long-ago Third World Ireland? Please help me understand the way your mind works here, sir. I am a shrink, so I can handle warped logic, trust me – I see it everyday in my sickest patients.

      Secondly, please also clarify whether in your 100,000 so-called “illegal immigrants” or “immigrants” in general you also included people from Poland, Hungary, Romania, Bulgaria, Cyprus, and other Eastern European nations that joined the EU during the past 6 years? I am asking for clarification because I have heard numerous Irish ignoramuses before refer to Easter European EU Nationals as “illegal immigrants”. Now, if you are unclear about what the word “immigrant” means, please see to educating yourself about the fact that any citizen of any of the 27 EU member states cannot be called an “immigrant”.

      Now, regarding your other comments about the family of 4 collecting 37,000 Euros tax free, or the 50% tax evasion rate, to me it sounds very much like Spain, another not-so-long-ago Third World nation that was artificially catapulted to First World status based on handouts from abroad, while the 19th century mentality of the country remained unchanged. Your Ireland does reflect a 19th century mentality, and that is nothing to be proud of in the 21st century.

      Simply put, what is now happening in Ireland and Spain is the effect of market forces lowering these countries to their proper respective stations. You are now being downgraded to your rightful Second World status.

      You know, I live in Chicago, a city full of Irish American citizens who came here at a time when starvation was rampant in Ireland largely due to mismanagement, stupidity, and corruption. To me, it does not sound like much has changed.

      Meanwhile, how about you go drown your sorrow in yet another bottle of Whiskey…LOL

      Vinny G.

      1. Spike


        While some of your criticisms are valid (more than any other nation, Ireland has benefited from emigration, and I have no time for those who turn on legal migrants), your comments are equally distateful.

        The initial migration due to starvation that you mention was indeed due to mismanagement – by the British, who ruled the place at the time, and had reduced the Catholic Irish to subsistence on the potato. You might as well blame the Poles for WWII.

        Ireland has been woefully mismanaged, and a wonderful opportunity has been squandered. Being a small island, we will feel the effects. Hopefully this leads to serious political reforms. We will eventually dig ourselves out, and move on. But ask yourself how many of the issues are any different in the US?

    3. michael

      Excellent analysis on Ireland. I think Iceland and Ireland are the templates showing what will happen in America. Every where the politicians and the bankers are devouring the real economy, slowly destroying small businesses, consumers and taxpayers. The banks are zombies as most know. What is not know or even considered is that our governments are also zombies that will default and disintegrate.

  4. Ed

    One aspect of the US situation is that the country has a strict two party political system, and both parties are behind the bailout. So there is really no place for angry voters to go.

    Is this the case in Ireland? Ireland has several viable (ie represented in the Dail) smaller parties. Are they also supporting the status quo or could one serve as a channel for voter anger?

  5. dearieme

    Ireland celebrated Independence by fighting a Civil War. Is it about to celebrate giving up Independence, via the Lisbon Treaty, by having another?

    1. Vinny G.

      If you don’t like being part of the EU, why not just get out already? Let’s see how quickly you revert to Third World status on your own.

      As an American as well as EU citizen, I am not very keen on having my EU tax contributions being used toward propping up an unreasonably high Irish standard of living.

      Nothing irks me more than the arrogance of fools who conveniently choose to ignore their own recent history.

      Vinny G.

  6. sean

    Ref Ed’s comments on political parties.

    There are several political parties in Ireland but essentially they are either corrupt(the government) or basically collude in this corruption.For example each member of parliament(Dail) can claim expenses amounting up to and sometimes exceeding 200,000 euros annually which do not not have to be vouched.Think about that : the makers of our laws have constructed an open till for which they do not have to provide a single receipt.This is in addition to their very high basic salaries.
    Our Taoiseach(Gaelic word for Prime Minister) receives a basic salary (257,000 euros) which is greater than any other EU head of state and also I think close to what the US President receives.Ireland has a population of 4 million and a GNP circa 160 Billion euro.

    The government also outsourced decision making to hundreds of quangos so they did nt have the responsibilty of making decisions.Consequently the country is run economically by a gangster banker elite and socially by very strident advocates of extreme left wing idealogies.

    Given the massive flows of money into Ireland following joining the euro the real power now resides with the banks,Developers and real estate agents.Laws passed in parliament are simply ignored or bypassed and there is no enforcement.

    The elites in Ireland ,comprising the entire political class,the bankers and much of mainstream media colluded in the mad deception and are trying their best to keep a lid on the situation and prevent too much of the truth leaking out.

    But the evidence is there if you look.Just look at the Irish central statistics office publications online regarding unemploment ,money flows,investment ,trade,income from taxes etc and you will see a country that is right now hopelessly bankrupt.

  7. Spike

    As an ex-pat Irishman (pardon the pun), this was all too depressingly predictable. We had a boom built on catching up to where we should have been without incompetent politicians pre 1990 (google Charlie Haughey). We were a low-cost English-speaking highly educated route for US high tech firms to enter the EU. A once-in-a-lifetime catch-up windfall, which was not properly invested.

    We are now at a cost and logistical disadvantage vs mainland Europe, and the standard of living will have to converge to the mean.

    For years I spoke with bankers on my trips home and they denied the existence of a property boom, no matter how the data was parsed. The legacy is a generation of debt slaves, locked into their mortgages. Ireland has a tradition of emigration. It will be interesting to see if the most highly qualified people pick up and leave rather than face the bill that the banks appear to be trying to stick the taxpayers with.

    “NAMA … in most peoples view straightforward theft of taxpayers money” is an accurate read of popular sentiment. For a sense of the level of outrage (and a good laugh to boot) I suggest reading an Irish blog, – plenty of NAMA related entries.

  8. Paddy O'Bejaysus

    NAMA will issue “NAMA Bonds” to the Master SPV. The Master SPV will repo the bonds with the ECB for cash. The Master SPV will pay the banks cash for their toxic loans. Once done it can’t be undone. All NAMA debt if Sovereign debt.

    The “market” value of the underlying security for the €77 of loans is, according to the Minister for Finance, €47. Included in that €47 is €4 liquidation valuation for the “worst” of the toxic loans.

    So only €43 of the security will be around to pay off the debt (the minister has accounted for the €4 separately).

    The Minister states that he expects the “Developers” to repay principle of €62 over the course. Also the developers are expected to pay €12 in interest over the course.

    In all the developers are expected to “pay” €74 on assets worth €43 in the space of ten years.

    That’s an increase of 42%, not the 10% the Minister states will allow NAMA to “wash its face”.

    But its worse.

    NAMA has the authority to borrow another €5 to €10 (guaranteed by the State for “finishing out” of development projects. The assumption seems to be that every Euro spent on “finishing out” will be fully recovered and reflected in the market value of the developments. A brave assumption I think.

    NAMA will roll-up €4 of interest in its first three years of operation.

    NAMA will spend €2.6bn in “professional” fees at a rate of €240m per annum.

    The Ministers valuation of €47bn for the underlying security is based on the idea that because yields on commercial property in Ireland are currently 7% and average EU yields are 3.5% Irish property prices MUST rise to bring the Irish yield into line.

    He seems to think that Irish rental values have a magic floor below which they will not fall, which of course would bring Irish yield into line with the EU.

    So the true market value of the underlying security could be say €30 to €35.

    That kinda changes the outlook.

  9. bill

    I spent several months in Ireland circa 1987. At that time, if memory serves, unemployment was 20% and gov’t debt was 150% of GDP. Something like 25% of the Irish in their 20’s had emigrated. Social spending was similarly high relative to wages at that time (though I’d like to find out more about that. 37,000 Euros is a ton of money. Not saying it isn’t true, just that it’s pretty astounding). Anyway, the point of my post is that while things are really bad right now, they were really really horrendous 20 years ago.

  10. danm

    Have you noticed that islands seem to top the list in precipitated descent?

    Has anyone read Collapse?

  11. tgmac

    Ireland’s GDP as a percentage of the EU total is less than 1%. Ireland also has access to the ECB through its involvement in the Euro, and the ECB has been very “flexible” in allowing Ireland access to funds both pre and eventually post NAMA. The ECB at the moment is fulfilling the role of the IMF very nicely.

    The current govt plan is extreme wage deflation (mostly centred on the poor and lower middles classes) coupled with a stated policy of emmigration. The Minister of Finance, Brian Lenihan, is on record via the MSM stating that he hopes that between 100-150k people will leave Ireland by 2011. While other sane governments would view such policies as overt acceptance of their culpabibility and failure, our government thinks they are “making the tough decisions”. They are gaining confidence in themselves all over again.

    While there is no one single feature of the crisis that is unique to Ireland, the aggregate of features is truely astounding. But a bit of background. Before the Celtic Tiger ever reared its ugly head, the country was awash in tribunals. The tribunals, set up by the very politicians who the tribunals were investigating, were merely a method of de-criminalising the fraudulent behavior rife in Ireland pre-Tiger. One such tribunal focused on fraudulent zoning laws and bribery. There were a few sacrificial lambs but the tribunals shielded the high level players in both main parties, but mostly on the ruling juanta. The so-called architect of the Tiger, Taioseach Bertie Ahern eventually resigned over tribunal enquiries but was given a hero’s requiem by the MSM. Among the features that cropped up during his lenghtly hearings was the fact that as Finance Minister he had no checking account, that he passed monies to a lady friend to buy property and that thousands of uk pounds resting in a bank account were won on horse racing! It also turns out that as Taioseach he wasn’t compliant with tax regulations. I wonder why?

    The symbol of this type of governance was there for all the world to see in the form of the now infamous tent at the Galway races. Here the ruling juanta put up a tent where the great and good of banking, property development and industry flew in by helicopter and bade homage to our tribunal politicians. If you’ve ever seen the opening wedding scenes from the Godfather, you’ll get the idea.

    In the meantime, things for many people are worse than the stats provided on other posts suggest. The December budget will be brutal and highly deflationary while the govt hopes that NAMA will prop up asset prices and make the gamblers in property, bond and share speculation somewhat whole again. Real unemployment and under employment is higher than suggested due to short working weeks, return to education, change in personal status from one dole scheme to others and, yes, emmigration.

    Ireland is a text book case study in Kleptocracy and Oligarchy for anyone who wishes to investigate such topics. A sub-investigation of govt by media announcement followed on by a media blitz supporting governments policies is also worthy of study, but would need to investigated in tandem.

    slán agus ádh mór ort

  12. tgmac

    Edit to previous

    The Taoiceach, formerly the Finance Minister, had no personal banking account, period!

    He funneled everything through a his local constituency political party account for quite a while.

  13. disgruntled observer

    Hi all,

    I recommend reading

    You see, Ireland has a form of media communication that you may be familiar with in the states. It’s called control by fear, and when it comes to the economy they’re like Fox. they make you afraid, and then they do what they want. And yes Edward Harrisson, you are being duped. This stuff about the IMF is not for your consumption, but for ours. You really should learn about politics. It’s all local.

    Look, we’re like the US: 1% holds 20% of the wealth,
    2% 30%, etc. Of the top earners, they boast with delight, that they’ve managed to make them pay an effective rate of 20% tax. 10% of that top 1 percentile pay less than 5% on their income. So we’ll start with that, and then extrapolate the budget deficit.

    Uniquely in the OECD we have held our exports constant. Many suffering with the sterling exchange rate, but constant nonetheless. In q2 we had GDP at 0.0% and I’ll bet we’ll be growing by year end. Increasingly the labour market looks like turning and we’re nowhere near spanish levels. Compared to many other countries our economy is incredible. So what’s the fuss about. Well, it goes like this. Instead of awarding real wage rises, they lowered taxes on income during the boom, and the gov subsequently subsidized corporate profits. It did this and provided a european type system by increasing transactional taxes on property transactions. So when the bubble burst, so did the tax base.

    We do not have a spend problem, we have a tax problem. We’ve destroyed our tax base. See comment about the wealthy above. We’ve essentially created a kleptocracy that any right wing crank would be proud of. So instead of indentifying the real source of our deficit, which is not an external deficit, but an internal one, we chose to pretend that we’re better paid than anyone else (a myth), and that we have a progressive system (another myth), and that the problem is that we’re not competitive (complete rubbish – see destasis). And then you guys, not understanding the politics of the country become mouthpieces for more fear mongering, more right wing nut policies that will send us back a generation, and more generally speaking BS.

    Look, they’re going to give a monstrous gift to the banks, their bondholders, and every other parasite of the global system with his hat out, and they’re going to cut basic welfare, (which is NOT even close to being generous compared to most European systems). But you’ll have every crank on the web writing up every extreme example, as they do in the irisheconomy blog, that represents their own indoctrinated view.

    I can see it happen now. We’ll be growing in Q3 and Q4 and you know what, they’ll wreck it with austerity.

    And before anyone starts banging on about us not being able to afford the deficit, please look at deficit spending in other countries, look at their starting position, look at Irelands starting position, consider a cash balance of €30 billion, look at our projections and then make your comment.

    Please read through the last few posts of Michael Taft at There’s no one else in ireland making what is a straight forward rebuttal that would be mainstream almost anywhere else. What Edward Harisson et al is receiving is untreated salt water.

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