A perfect storm

Ireland, and Europe in general, are under one of the worst winters in years. It is like if the weather wanted to imitate the financial general climate. Bad times are in the forecast. And for Ireland, it will may be longer than for others.

Ireland brings some of the same problems as the US or the UK. But exponentially maximized. The burst of the house bubble was the detonator. But unlike the US or the UK, Ireland lacks of the tools to lower the interest rates and equilibrate the balance. There is another country with the exact same problem as Ireland: Spain. But at least, Spain has an internal market ten times bigger than the Irish, to keep economy going.

The Celtic Tiger was one of the firsts to show weakness signs. It was, for example, the first one to back up the banks fundings to inspire confidence. And even though, the 10th of September last year, Mr. Cowen’s Government had to launch a bailout of €400 billions for the Irish banks. A bailout that was finally unsuccessful for the third entity of the country, the Anglo Irish Bank, that was nationalized on the 16th of January this year.

Economic indicators aren’t too inspiring either. If in 2000, in the peak of the Celtic Tiger apogee, according to the Central Statistics Office (CSO), the GDP growth was of a 15%, in 2007 that number dropped to half of that, less than 7.5%. Even worst, the GDP growth of 2008 registered negative numbers of more than a 2%. And according to the Irish Times and The Economist, for 2009 and 2010 it will drop by 4% and 5% respectively.

With the GDP in free fall, the national debt is ascending without control. According to the CSO, Ireland went from €35 billions of debt in 2007 to €38 billions in 2008. Fitch Agency estimates in €47 billions the debt for 2009, a 26% of the GDP. And this doesn’t include eventual bailouts or nationalizations.

The deficit isn’t either helping to equilibrate the balance. According to the Eurostat and the estimations of the Irish Times, Ireland will go from a superavit of almost a 2% of the GDP in 2006 to a forecasted 12% deficit in 2009.

Another worrying factor is the unemployment. During the Celtic Tiger years and up until 2007, the unemployment rate was of 4%, almost the one for a full employment society (full employment is considered to be a 3% of the active population). But according to the Eurostat, last year it almost doubled the size to a 6.7%. The Economist forecasts a 9.5% for 2009, while the Irish Times sees double digits (a 12% of unemployment) in 2010.

Inflation is as well falling free. The performance of this indicator is even more worrying in the last few months. According to the CSO and the Eurostat, in the last six years the Harmonized Index of Consumer Prices (HICP, used to measure the inflation in Ireland) fluctuated between the 2 and the 4%, always in ascending lines. June 2008 saw the maximum value. Since then, it has dropped in six months what grew in six years, from a 4% to a 1.25%. And the forecast is that will continue descending.

Finally, the Stock Exchange index (ISEQ) is a good print of the performance of Irish economy in the last year. Even it is a general fall to hell in all the western economies. The ISEQ hasn’t recovered itself anytime, unlike other main indexes. If we focus our attention only in the financial market, the footprint is even more significative. The ISEQ had almost 18000 points in January 2007; in January this year it has only 760. It is a drop of more than a 95%.

With all this data, we can see Ireland is not under a heavy rain. It is a perfect storm. And the winter looks like if it will be long and hard.



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