Can Ireland end up like Iceland?

ionix5891

economics is outside my area but i find the subject interesting so taught ill post here (hope thats ok?)

was reading this

http://www.guardian.co.uk/commentisfree/2009/jan/18/recession-banking

and following first paragraphs struck me

It's no wonder that so many Icelanders are angry. They live in a country bankrupted by the excesses of their bankers, who took on liabilities 10 times the nation's GDP, betting billions in Britain's property bubble. Bailed out only by a jumbo IMF loan, inflation and interest rates are now 18% and rising. Many are considering emigration. Only membership of the euro, if it can be secured, offers a lifeline.

Ireland made the same bet, and on Friday the government had to nationalise its third biggest bank - Anglo Irish. Like the Icelandic banks, it had been speculating in Britain's property bubble. The joke across the Irish sea is that the only difference between Ireland and Iceland is one letter and six months. But there is another, more crucial, difference. Ireland is in the euro; otherwise, like Iceland, it would be bust.

discuss

jayok

There's no doubt that the Euro has saved us from going the way of Iceland, but I'd imagine that if we still had the Punt then possibly we wouldn't have been in this mess as the Central Bank could have cooled the bubble from hitting epic proportions - maybe not. Equally if we weren't in the Euro now we could still be fecked as a currency. But this is another discussion.

Either way the risk of the IMF having to come in and bail us out is not an impossibility but I would think unlikely. The reason for this is that we are a member of the Euro and it would seriously damage the currently - IMO - if a member had to be bailed out. When we joined the Euro we signed over certain commitments and obligations, but so did other member such as German, France, etc. The possible damage to these countries who base the currency on us as well would mean that it's more likely the ECB will bail us out but place some serious restrictions on what we can do with the funds.

If the ECB can't bail us out then the EU may. But we've few friends in there at the moment. No to Lisbon, from Jewel of the EU to basket case, mis-management, arrogance, it doesn't bode well.

Of course all of this is against a background of normally what would happen. If recent events have shown us anything is that anything can happen.

amcalester

shoot me down if I'm wrong but was Icelands GDP to National debt ratio not something like 300% while Irelands is around 32%?

If it is (and I can't remember where I read that) are we not better placed to weather the storm than Iceland?

cavedave

There was a similar discussion here some time ago that fizzled out.

suggesting Ireland could be in this sort of trouble has been dismissed

Black Briar 16:36 18-11-2008

This isn't after hours I'm starting to worry myself now...
Not about the banks but about the pervasiveness of absolute twaddle I'm reading in two threads on this forum.

It's up there with the earthquake/volcano threads I've seen on the weather board.

Baird 18:00 18-11-2008

For crying out loud where on earth do people get this stuff from?

jhegarty

The euro has saved us , but is also the cause of our problem. We should have had 5%-6% interest rates over the last few years.

ionix5891

jhegarty wrote: »

The euro has saved us , but is also the cause of our problem. We should have had 5%-6% interest rates over the last few years.

i taught the root of our problems was greed

Économiste Monétaire

Low interest rates are not the "cause of our problems." It's an argument based on absolute ignorance to asset bubbles and monetary economics, which is too frequently espoused. As if asset bubble did not exist before discretionary monetary policy was around. Fuel to the fire, yes. Cause? No.

Latchy

The icelanders are going back to the traditional ways of earning a living such as fisheries and going to invest more in tourisim to try re start their economy although it will take some years before they see the results of their efforts .

orbital83

jayok wrote: »

but I'd imagine that if we still had the Punt then possibly we wouldn't have been in this mess as the Central Bank could have cooled the bubble from hitting epic proportions

FALSE

Sorry jayok, but please do not attempt to perpetuate that myth.
We, the Irish, decided to have this boom and bust, it has NOTHING to do with those big bad boys in Brussels.

Central Bank has several policy tools at its disposal other than interest rates. It decided not to use them.

* It could have raised bank reserve ratios so the banks have to hold more cash balances and can't lend as much. It didn't.
* It could have outlawed mortgage loan-to-value above 80%. It didn't.
* It could have outlawed mortgage salary multiples above 4x for single applicants and 3x+1.5x for couples. It didn't.
* It could have increased bank capital requirements so the banks are insulated against losses. It didn't.

Government also has tools at its disposal.

* Government could have realised that a debt-fuelled bubble was developing in the economy and taken measures to control growth. Instead, public spending was increased by 48% over 3 years by Mr Charles McCreevy. This long-term expenditure was paid for out of short-term property bubble tax revenues. The naysayers were told to commit suicide.
* Government could have raised capital gains tax on residential property to stop speculators buying property and flipping it for overnight profit at the expense of young couples struggling to put a roof over their heads.
Instead, CGT was dropped from 40% to 20% by Mr Charles McCreevy.
* Government could have ended tax incentive schemes encouraging property development in areas where demand is low.
Instead, schemes like Section 23 were extended by Mr Brian Cowen. We now have ghost estates the length and breadth of the country. You, I, your children and mine will cover the bad debts and eventual demolition costs.

I could go on.

Agent J

Perhaps this is being over simplistic but when i look at the mess that are the Irish banks, the laughing stock that is enforcement and the beyond funny joke that is the the regultor and the almost incestous relationship between the builders, the bankers and the politicians.

Do we really think if these people have been in charge of our interest rates we wouldnt have been in a worse mess?

Samurai

Easily.

just replace the 'r' with a 'c'

cavedave

The risk of a triple crisis - a banking crisis, a currency crisis and a sovereign debt default crisis - is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity.

As a member of the euro area, it would have been much easier and cheaper for Iceland to defend itself against speculative attacks on its banks - provided the banks and its government were indeed solvent and perceived to be so

(emphasis added)

Ireland has potential liabilities of twice its GDP which is significantly less then Icelands which were 9 times GDP.

jayok

John J wrote: »

FALSE

Sorry jayok, but please do not attempt to perpetuate that myth.
We, the Irish, decided to have this boom and bust, it has NOTHING to do with those big bad boys in Brussels.

Central Bank has several policy tools at its disposal other than interest rates. It decided not to use them.
.
.
.
.

Fair enough John J. I wasn't blaming Brussels for this, simply I was speculating(maybe naively) that if we could have controlled our own interest rates then the Central Bank could have raised rates to slow lending growth.

You are right re the other methods the CB had at it's disposal and I suppose the IFSRA to boot. Of course since we still control taxation, we could have done a lot with taxation but alas higher taxes don't win votes. There appears to be few patriots (if any) left in the Dail and this is still the case.

Funny thing is the very people who lead us into this mess are still in charge! :rolleyes:

redarmyblues

Sorry jayok, but please do not attempt to perpetuate that myth.
We, the Irish, decided to have this boom and bust, it has NOTHING to do with those big bad boys in Brussels.

Central Bank has several policy tools at its disposal other than interest rates. It decided not to use them.

* It could have raised bank reserve ratios so the banks have to hold more cash balances and can't lend as much. It didn't.
* It could have outlawed mortgage loan-to-value above 80%. It didn't.
* It could have outlawed mortgage salary multiples above 4x for single applicants and 3x+1.5x for couples. It didn't.
* It could have increased bank capital requirements so the banks are insulated against losses. It didn't.

Government also has tools at its disposal.

* Government could have realised that a debt-fuelled bubble was developing in the economy and taken measures to control growth. Instead, public spending was increased by 48% over 3 years by Mr Charles McCreevy. This long-term expenditure was paid for out of short-term property bubble tax revenues. The naysayers were told to commit suicide.
* Government could have raised capital gains tax on residential property to stop speculators buying property and flipping it for overnight profit at the expense of young couples struggling to put a roof over their heads.
Instead, CGT was dropped from 40% to 20% by Mr Charles McCreevy.
* Government could have ended tax incentive schemes encouraging property development in areas where demand is low.
Instead, schemes like Section 23 were extended by Mr Brian Cowen. We now have ghost estates the length and breadth of the country. You, I, your children and mine will cover the bad debts and eventual demolition costs.

I could go on.

Very well said. There seems to be a sneaking campaign to bring back McCreepy from Brussels where he is widely disliked. His decision to half Capital Gains and cut income taxes in what I think was his last budget vastly aggravated Irelands inflationary bubble in the noughties. His "'aving it large" philosophy encouraged many previously conservative people to punt on risky property speculations in obscure and corrupt parts of the world, notably in Bulgaria and Kerry. I think the EB hauled him in for his fiscal irresponsibility after said budget and he reacted by sneering at the bank officials concerns.

KEEP OUT CHARLIE MCCREEPY

Économiste Monétaire

John J wrote: »

FALSE

Sorry jayok, but please do not attempt to perpetuate that myth.
We, the Irish, decided to have this boom and bust, it has NOTHING to do with those big bad boys in Brussels.

Central Bank has several policy tools at its disposal other than interest rates. It decided not to use them.

* It could have raised bank reserve ratios so the banks have to hold more cash balances and can't lend as much. It didn't.

Reserve ratios are determined by the ECB (specifically, enforcing minimum reserve regulations agreed by the governing council), each Eurosystem member NCB does not alter this ratio at will (Minimum Reserve Regulations are outlined in ECB/2003/9). Also, the ECB is in Frankfurt...

nesf

Short answer: No, because we aren't going to have a currency crisis. People really need to get their head around why this difference is so crucial.

cavedave

Shares in AIB were down almost 60% to 60 cent. Bank of Ireland was down 40% at 45 cent. Both of these were new low points. Irish Life & Permanent also fell more than 40% to €1.25.

Today's falls come in the wake of market suggestions that Bank of Ireland and AIB look unlikely to be able to raise extra cash from private investors to top up a proposed state investment in the banks.

nesf

Short answer: No, because we aren't going to have a currency crisis. People really need to get their head around why this difference is so crucial.

agreed. But I feel they also need to get their heads around the perception of solvency i mentioned earlier.

nesf

cavedave wrote: »

agreed. But I feel they also need to get their heads around the perception of solvency i mentioned earlier.

Agreed, but the currency crisis is an integral part of Iceland's woes which we cannot experience (realistically).

If we had the Punt still, our banks would be in way more trouble given that they'd probably would have had substantial Euro/Punt/Dollar debts to finance etc.

cavedave

One possibility is that Ireland may be the first to fall, as they are in deep, deep trouble. There is already one prominent commentator talking of default on debt, and the prospect of a rash of defaults across Southern Europe. Although this is just one commentator, there are solid reasons for why Ireland is so vulnerable, in particular a very nasty variant of the credit bubble

The article is the summation of a plausible theory that the UK economy is about to enter into hyperinflation. If you accept we will be saved by the euro what will save the UK? If they do experience this scale of trouble, they are such a large element of our economy that a Reykjavik-on-Thames situation would have grave consequences for us.

The UK's liabilities to debt ratio is 2 and Icelands was at least 9.

population

amcalester wrote: »

shoot me down if I'm wrong but was Icelands GDP to National debt ratio not something like 300% while Irelands is around 32%?

If it is (and I can't remember where I read that) are we not better placed to weather the storm than Iceland?

Amazingly it is actually close to 1000%

That is the statistic given by Poul Thomsen who is the IMF mission chief for Iceland.

BenjAii

cavedave wrote: »

The article is the summation of a plausible theory that the UK economy is about to enter into hyperinflation. If you accept we will be saved by the euro what will save the UK? If they do experience this scale of trouble, they are such a large element of our economy that a Reykjavik-on-Thames situation would have grave consequences for us.

The UK's liabilities to debt ratio is 2 and Icelands was at least 9.

I read that this morning and its sobering, Willem Buiter is no scare mornger either.

I have a horrible feeling we are entering Phase II of this crisis and its spinning out of governments ability to control events here and in the UK.

Our system of capitalism is looking more and more broken by the day and it seems the entire banking sectors ability to function is in collapse, with the initial late 2007 response to the crisis now clearly falling short of what is required.

cavedave

An article from the times about the risk of Ireland defaulting on its debt.

FEARS are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector.

The cost of buying insurance against Irish government bonds rose to record highs on Friday, having almost tripled in a week. Debt-market investors now rank Ireland as the most troubled economy in Europe.
...
Johnson said: “Don’t, please, tell me more about the basic principles of financial reform unless and until you have addressed the Irish problem. And don’t tell me the Irish have to sort this out for themselves. Eventually, the world always comes to help; check your notes on Iceland.
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“It’s much better and much cheaper to come in early and decisively. We need a plan of action for Ireland, and we need it now.”