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Greek Contagion Spreads to Ireland

For the past month, contagion from Greece’s slow motion meltdown has been spreading west. Spain is now on the verge of collapse, and Italy and Portugal may not be far behind. Now the crisis may be spreading north as well. Despite recent signs of recovery in Ireland, concerns about a Greek euro exit and a possible Spanish bailout have hit the country hard over the past few weeks. According to Reuters, Dublin recently saw bond yields rise by nearly 60 basis points over two days. Short-term borrowing costs are beginning to rise again and appear likely to surpass costs on long-term deals. This has generally been taken as a sign that investors are skeptical about Ireland’s chances of weathering the current crisis, which will make it considerably more difficult for the government to reach its debt targets.

Ireland’s troubles should also be extremely worrying for the rest of Europe. Although much of the blame for Europe’s current troubles has been placed upon the “PIIGS”— countries with stagnant economies and high sovereign debt—Ireland has always been the odd man out in this group. In the 1990s, it was the success story of Europe: a small, formerly impoverished country that achieved enviable growth and prosperity through hard work and competitive, pro-business policies. Indeed, in many respects, Ireland’s pre-crisis policies were the polar opposite of those of the Club Med states.

This difference extends to their reactions to the 2008 crisis. Over the past few years, Ireland has become the “good kid” of the European crisis, adopting austerity measures and actually struggling back to some modest growth. While Greece continues to resist the changes demanded by its European creditors, Ireland has taken the opposite tack, immediately implementing nearly all of the changes analysts have suggested for troubled countries.

Unfortunately, it looks like this won’t be enough. Contagion from Greece and Spain (plus, we suspect, the slowdown in the UK) are now threatening the modest recovery Ireland has managed over the past few years.

This is the clearest sign yet that the euro may be beyond saving in its current form. If the Irish can’t manage this, nobody can.

[Update: This post originally claimed that Irish bond yields rose by 60 percent, rather than 60 basis points. The error has been corrected.]

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  • Eurydice

    Oh, for heaven’s sake, there is no form – that’s the problem. The Euro is still an unformed idea with 10 tons of regulations attached to it. As for “contagion,” it seems that only outside players acknowledge that the EU is actually one body and all appendages share the same circulatory system.

  • thibaud

    Maybe austerity by itself does more harm than good.

    If Irish assets are overvalued, then Ireland’s creditors need to take a significant haircut, and ditto for the rest of Europe.

    In practical terms, that means Europe must allow for a significantly higher inflation rate than Germany’s hard money obsession will allow. If Europe were to increase inflation to the 5-6% range, the debt crisis would be eased significantly and Europe could get back on a growth path.

  • Pat Larkin

    The Reuters article says that Ireland’s borrowing costs increased by 60 basis points in two days, not 60 percent. Big difference.

  • Jim.

    Would Germany be more willing to extend help to a country more willing to meet Germany’s high standards? There’s more than one way to “make an example” of a country, and it doesn’t always mean harshness.

    Although, weren’t Ireland’s troubles caused by the fact that it took an unbelievable amount of private sector debt onto public sector books? It would be good for people to keep in mind what sort of a mistake that is.

    As for wishing for inflation… remember, unless you’re not borrowing any new money and paying every cent of every bond that come due, bond markets can stick you with a punitive interest rate to account for the value that the instrument loses t inflation.

    There is no magic solution. It is bad for governments to spend more money than their people are willing to pay in taxes, and it is bad for banks to lend money carelessly. These will always be true.

    Less about this world changes than some people like to think.

  • Eurydice

    @Jim #4 – At the bottom of it, I think Germany’s more concered about the actual money that it is about setting a good example. By EU rhetoric, Portugal has also been an obedient country, and Spain was considered the same, too, until it was declared otherwise. But “good” countries can still have bad problems and there’s still a limit to how much Germany can pay out in rewards.

    As for Ireland deciding to bail out its banks, that’s true – but Ireland did directly what everybody else is trying to do indirectly.

  • dearieme

    “hard work and competitive, pro-business policies”: is there any evidence that the Irish worked any harder than, say, the Portugese? Must everything be infected by turgid moralising?

  • thibaud

    “Good” = low tax, apparently. Ireland’s property bubble was marked by at least as much, if not more, corruption than in any other country.

  • Mark Michael

    I’m glad someone made the update that Ireland’s interest rate had gone up 60 basis points (0.6% increase) rather than 60%! When I saw that “60%” I thought, “That can’t be! Holy cow, panic has really set in.” I was skeptical, but in a hurry & didn’t check it out.

    Here’s a link to the CIA World Fact Book for Ireland’s Economy:

    It’s out of date: latest data are from end of 2011, and this “news” is obviously May 2012. But it gives one a general quickie picture of the state of Ireland’s economy. A few tidbits from it:

    In 2011:

    GDP growth rate was 1%.
    Per capita GDP was $39,500 (btw, that’s slightly HIGHER than Germany’s, which was $37,900 for 2011)

    Unemployment rate is 14.3%

    Revenues = $76.2B or 34.4% of GDP
    Expenditures = $98.59B or 44.5% of GDP
    Deficit = $22.39B or 10.1% of GDP

    Public debt = $237B or 107% of GDP

    Commercial bank prime lending rate as of 31 Dec 11 = 3.5% (world average = 5.45%)

    Exports = $124.3B or 56% of GDP
    Imports = $71.35B or 32% of GDP
    Trade Surplus = $52.95B or 24% of GDP

    External Debt, publicly + privately held = $2,352B as of 30 Sep 2011

    NOTE: This external debt is the albatross hanging around the neck of the poor Irish taxpayers, thanks to the abject stupidity of its politicians.

  • rkka

    Mead’s “hard work and competitive, pro-business policies” in Ireland created an epic private sector property bubble, and when it popped the Irish government submitted the Irish people to decades of debt bondage by bailing out their criminally reckless banks.

    Nothing about Mead’s praise of Ireland’s “pro-business policies” indicates that he is the least bit serious about elite criminality.

  • Mark Michael

    Comment on 9 says, “Mead’s ‘hard work and competitive, pro-business policies’ in Ireland created an epic private sector property bubble…” Most Irish businesses had nothing to do with the sectors that created the property bubble.

    If I recall correctly, there are 600 American companies with operations in Ireland. They mostly use Ireland as a base to sell into the EU. Companies like Pfizer, Intel, Microsoft, HP, etc. They took advantage of the 12.5% corporate business tax and Ireland’s very educated workforce. Their high salaries is what raised the average Irish income to near the top of the ladder in the EU.

    The property bubble should be blamed first and foremost who were directly involved in creating it: the property developers who overbuilt, the banks who made too-risky loans to those developers and the construction companies building the buildings, and then the property purchasers who bought overpriced properties that were beyond their ability to handle the monthly payments.

    Of course, once the crisis hit, jobs were lost, then more homebuyers could no longer make their monthly mortgage payments.

    Let’s see. Then there are the government regulators who are supposed to be watchdogs on the banks. (I assume Ireland has something like our FDIC, plus their government central bank should also monitor the health and risk management of all of the banks in the system. Just like our FDIC and Fed did such a wonderful job of monitoring our banks during the financial panic of 2007-09! Oh, wait..)

    IMO the worst performers in just about any country that has a financial crisis are the government watchdogs that are supposed to blow the whistle before the bubble gets too big to deflate safely. They seem to be the last ones to recognize a problem.

    A non-bank risk example is our SEC was alerted that Bernie Madoff might be running a Ponzi Scheme something like 8 times over 16 years, yet they never uncovered it. He finally turned himself in when the financial crisis caused too many of his “customers” (pigeons) to try to withdraw their “investments.” Now, our FDIC was a little better than the Fed in the 2007-09 crisis, but they had more practice with the S&L debacle of the 1980s – 1990s.

  • thibaud

    Corrupt politicians => Blue Model’s failure. This underscores the need for less government regulation, lower taxes, a small state.

    Corrupt bankers = personal failures. This underscores the need for more religious instruction, church attendance, and less government generally.

  • Jim.


    Please note that inculcating a belief that you’re going to burn eternally for unethical behavior correlates highly to lower levels of corruption in politicians as well.

    It’s rooting out the hypocritical cynics that poses a problem, in that situation.

  • thibaud

    For those who wish to educate themselves on Ireland’s mess, here’s a readable and deeply-informed, well-research piece of first-hand reporting by probably the best journalist of our time, Michael Lewis:

    Punch line is that the crisis was stoked by a combination of extreme bankster recklessness + official corruption in the form of wily scoundrel and Prime Minister from 1997-2008 Bertie Ahern.

    And now the crisis has become unimaginably worse by the inexplicable determination of the Irish to make the banks’ bondholders’ whole.

    Again, our elites’ weird insistence on protecting bank shareholders and bondholders from the consequences of their decisions is making our economic troubles vastly more difficult than they need to be.

    The politico-bankster nexus is by far the biggest source of our economic misery. Pity that WRM and our smarter media voices don’t even address this.

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