Bailout Exit: Ireland has fixed its broken legs, but her heart remains critically ill
When our loved ones are seriously ill in hospital, we take every little piece of good news as a sign that everything could turn out alright. Notwithstanding the very real benefit of positive thought, we are clearly biased towards a good outcome. We really want the person to recover.
Behind the scenes, though, the medical staff will (if you are lucky) remain relatively dispassionate observers of the scene. Whilst you definitely want positivity and a little cheerleading from them, you ultimately want to know, and need to know, the truth.
When it comes to our ailing economies, we are usually unable to pinpoint a single arc of truth. There’s the old joke:
“How many economists does it take to change a light bulb?”
“None, can’t you see it is getting brighter again?”
So as Ireland is exiting the bailout from the IMF/ECB/EU, is the patient getting better?
Yes, categorically, the country is better off being able to exit the terms of the bailout than having to beg for a second one. If you hear a commentator who says otherwise, they are clearly still too preoccupied with long-past arguments to admit this truth.
However (there is always a “however”)…..above and beyond the fact that Ireland has met the bailout exit terms, the main reason she can exit the bailout is because the markets are willing to lend to Ireland once again – and at rates that make sense. 10 Year bond rates are around 3.5% today. Well down from the 14% highs a couple of years ago.
That willingness to lend is partly a matter of the Irish government’s willingness to sacrifice everything to pay its debts (even unsecured, unguaranteed junk-rated bonds in disgraced banks).
But it is also the trillions and trillions of dollars and euros swilling around the financial markets looking for a place to earn a return. That same money is keeping stock market prices remarkably high, and is fueling something of a mini-boom in corporate M&A activity. It is not, however, leading to a trickle down in better bank interest rates for individual savers.
The key for me lies underneath the macro-economic layer. How is Ireland’s recovery playing out “on the ground”? An economy is not just about the government balance sheet. In fact, in the main it is about the balance sheet of the country’s population.
For me, one chart says it all:
Having done little or nothing to deliver relief to ordinary mortgage holders may make the moral hazard crowd happy (they are strangely silent on banking moral hazard) – but this is the single biggest danger to Ireland’s economic well-being. In fact, it is long-term much more deadly than being in or out of a bailout scenario.
This is the backbone of the real economy. These are working families. They are the people whose discretionary income, if they have it, creates jobs in local service industries. Shops, restaurants and the like. Their prosperity is key to replenishing government coffers and helping close Ireland’s annual deficit of 7% of GDP.
Personal debt in Ireland is twice the country’s GDP (and remember, Irish GDP is hugely inflated by foreign revenue flows, which makes this debt figure even more serious).
Ireland may have mended it’s broken legs, but the heart is still in serious trouble.
Not only is Ireland still in a critical condition, but she will will not be unable to withstand a single external shock.