Paddy bashing in the Sunday Times?

The Sunday Times ran a piece, entitled Bad Luck of The Irish, covering the impact of the current recession. It poses the question “Could Ireland be the first euro country to go bust?”, without running a comparison. They almost certainly mean Eurozone, but it’s not made explicit. Greece would be our nearest competitors in that regard, but as the FT recently pointed out – Ireland is taking it’s position seriously and making the hard decisions, Greece is not. However, the report also contains this gem

“If you think the British economy is a mess, spare a thought for the neighbours”.

The author clearly thinks we (Ireland) are in a worse predictament than the UK. I beg to differ. James Carville once famously remarked “When I come back I want to come back as the bond market, because then you can intimidate everybody”. The bond market will be key for both economies. The crucial difference between Ireland and the UK is the former’s membership of the Eurzone. While Irish bonds trade at a wide spread over German bonds, the Euro has maintained it’s value well so far and investors are not displaying a lack of appetite for Euro debt, the same cannot be said for Sterling.

UK and Ireland head to head below the fold
Existing Borrowing Debt GDP Ratio :
Ireland : 24.9%
UK : 43.60%

Countries by public debt to GDP

Budget deficit :
Ireland – 9.5%
UK – 11%

Bank Bailouts
Nouriel Roubini is quoted as saying if an Irish instituition were to fail the cost would be 250% of GDP. This is hyperbole, a worst case scenario that likely won’t arise. It’s not the cost of bailing out one instituition that is 250%, but them all! Even that may be an exageration. Ireland’s GDP is in the region of $250 billion, total liabilities under the bank guarantee scheme run to €400 bn. It’s important to note that Irish banks aren’t very highly leveraged (unlike British and European banks, as pointed out by Commenter Dave) and that they don’t have big derivative exposures. They have made a lot of loans to property developers some of the outstanding deb will have to be written off, but the cost will be an order of magnitude lower than the €400 bn total liabilities.

Financial services play a larger and more important role in the UK economy. Could the UK exchequer afford bail out the entire financial system, which is much larger in proportion to the size of the UK economy? Highly unlikely.

Issuing Bonds
Ireland’s last Bond auction – succesfull
UK’s last bond auction – problematic. The 30% collapse in Sterling’s value is clearly impacting on the appetite of foreign investors for Sterling assets.

Two ECB governors recently hinted that the ECB may implement QE, which would involve the ECB purchasing member states government bonds. Both the UK and Ireland need to borrow to fund their economies during this downturn.

Balance of trade
Ireland – Imports falling faster than exports has led to a surplus in Ireland
UK – Balance of trade continues to deteriorate.