Photo: Doug Tengdin
Six years ago, the problems with Europe’s common currency were in full flower. Greece had defaulted on its Euro-denominated sovereign debt, and the economic challenges facing Portugal, Ireland, Italy, Greece, and Spain (the PIIGS) were headline news. The Greek economy was facing hard times. Their textile exports to the rest of the EU had been displaced by China, and they found it hard to compete. During their austerity measures, IMF bailouts, and debt renegotiations, focus shifted to other Euro nations with excessive debt.
Ireland was in the crosshairs. In 2006 their debt-to-GDP ratio was only 25%. But during the financial crisis, the government guaranteed the debts of the six main Irish-based banks. The economy turned down sharply. Unemployment in Ireland rose from 4% in 2006 to 14% in 2010. The budget deficit ballooned, and government debt grew to 124% of their economy. Irish debt was downgraded to junk status, and the IMF and EU provided an €85 billion bailout – a quarter of Ireland’s outstanding debt.
Wags at the time thought that this was just “kicking the can down the road.” The real problem for Ireland was their uncompetitive economy. But the Irish economy stabilized, and they managed to exit the bailout program just two years later.
Fast forward to today’s economy. Ireland’s greatest challenge seems to be international pressure to raise corporate taxes. Their tax regime is too competitive. Unemployment is 6%, their credit rating is A+, and the outlook is positive. Last month Ireland issued €4 billion in 5-year zero-coupon bonds priced above par. That is, investors paid the Irish government to take €4 billion of their money. There’s no more speculation about Ireland leaving the Euro and issuing devalued Punts. Ireland has joined the hard-currency core.
5-yr European government bond yields. Source: Bloomberg
If you put lipstick on a pig, it’s still a pig. But if you denigrate a modern, diversified economy with a productive, highly educated workforce, you might be making a mistake.
Douglas R. Tengdin, CFA