Wednesday, November 24th, 2010


The four year, National Recovery Plan 2011-14 was published this afternoon.  For those looking for a copy it can be found here.  A summary is here.  Interesting, but not pleasant reading.

Of the deluge of alarming analyses and media commentary on the Irish/European debt crisis that have emerged over the last 24 hours, surely the most unnerving proposition is that the financial markets have already moved on from Ireland and all attention is now focused on Portugal.  The “worst-case scenario” consequences feared from such a development are the spread of the financial contagion from Portugal to Spain (which, given the size of the Spanish economy would be difficult for the EU and IMF coffers to contain), and ultimately an existential crisis for the euro currency. Whether or not this worst-case scenario comes to pass remains to be seen, though recent increases in Portuguese and Spanish bond yields are far from reassuring. With this risk of financial contagion in mind, one wonders just how exposed are European member states to one another’s debts? The chart (below) from a recent Bank of International Settlements quarterly report illustrates just how interwoven the EU member states are in terms of the financial exposure to one another.

A number of features BIS quarterly report have surfaced in recent analyses but perhaps have not been succinctly stated:

  • As has been recently reported elsewhere, total exposure of British based banks to Ireland is in the region of $230 billion. Exposure of German banks is not far behind at $175 billion.
  • The chart above distinguishes between foreign claims on the public sector, the banking sector, and the non-bank private sector. In both the Irish and Spanish cases, the share of British, French, and German bank exposure to the non-bank private sector appears to be very high. One wonders what exactly will be the consequences of this. Does this mean that even when Irish banks are bailed out, there are still substantial non-banking sector debts that have to be tackled? Do these debts relate entirely to the legacy of Irish property development mania or is this exposure spread more broadly across the Irish economy?
  • Government debt accounts for a relatively smaller part of euro zone bank exposure to Ireland than in the cases of Greece, Portugal, and Spain.
  • It’s also apparent from the chart above that whatever Greece’s woes may have been, they didn’t stem from a bank crises on the scale of the shocking fiasco Irish banks have become embroiled in. Or, as the Greek finance minister succinctly put it, “Greece is not Ireland”.
  • That said, it’s clear that German and French banks were very exposed to Greek debt and are also very vulnerable to Irish, Portuguese, and (in particular) Spanish debts.
  • As one would expect, Spain does indeed face the largest exposure to Portuguese debt (coming in at over $100 billion). However, this is by no means the largest exposure of an EU member state to a peripheral neighbour, as indicated by the British banks’ exposure to Irish debts.
  • As of 31 December 2009, banks headquartered in the euro zone accounted for 62% of all internationally active banks’ exposure to Greece, Ireland, Portugal and Spain. However, that’s not to say that the other 38% is of no consequence! US banks, in particular, appear to have a significant exposure to both Ireland and Spain.

All in all, one would be forgiven for thinking that  the kindness of strangers is driven by the desperation of worried bankers.

Declan Curran

The financial and economic crisis that has hit the world and Europe since Autumn 2008 has had its most severe impact on a few European countries, countries that are often referred to as ‘peripheral’ from the standpoint of the geography of Europe or the EU: Greece, Ireland, Spain and Portugal. Does that mean that their geographically ‘peripheral’ position is at the heart of their current financial and economic problems? Not really. Or maybe, somehow. Maybe it was their location on the margins of Europe that played a part in their lagging economies compared to their EU partners in the 1970s and 1980s as they all joined the EU (1973 for Ireland, 1981 for Greece, 1986 for Spain and Portugal)? And maybe that explained to a certain extent the ‘fast-track’ paths to economic growth that some of them went for then, with the support of European funding for infrastructural upgrades in particular, but also based on what Henri Sterdyniak, from the OFCE research center, has called “macroeconomic strategies that have become illusory”. And that’s precisely what’s more important than their ‘peripheral’ location: the fragility of their respective economic development model. In the case of Ireland, that has been largely explained, discussed, documented through many posts on the Ireland after NAMA blog (since its creation at the end of November 2009, almost a year ago now) and other forums such as Politics.ie or The Irish Economy among others. But there hasn’t been too much discussion about how the Irish model compares to its ‘peripheral’ counterparts and what lessons Ireland could learn from them and their own crisis as it looks for a way to get out of the crisis and to rebuild its growth and a (hopefully) viable growth model. There’re a few things that I would like to highlight to that effect.

The Irish and Spanish experiences have been quite similar so far. Their public debt was quite low, their growth levels quite high, but in both cases growth was heavily reliant on real-estate and financial speculation. In Ireland, at the end of 2007, loans for real-estate development amounted to 250% of the GNP. That made for a huge real-estate bubble, the same kind of bubble that exploded in Spain a few months after the Irish one. While a large amount of the bursting of the Irish bubble is being cleaned up by NAMA, Spain has not created its own toxic bank to absorb the current 325bn euros of debts of the real-estate sector.

Portugal and Greece are in a different situation. Their major problem has been the lack of growth in the past decade or so (while Ireland and Spain were experiencing high levels of ‘growth’, but one that was highly illusory given its speculative nature). Their main problem is that their governments have been very keen on entertaining the idea that growth was happening: to international investors, to their own population, and to EU officials. They did so through rather irrational budget decisions. While Greece deliberately falsified and concealed its high levels of public debt and justified 4% annual growth since 2000 by emphasizing the performances of its real-estate industry and tourism (two sectors that are highly volatile), Portugal went overboard with public spending to stimulate domestic consumption while it struggled to boost the growth of its leading industries and main exports (e.g. textiles).

Among the four countries, Ireland is actually the only one that has developed a real and successful export-oriented economy, in particular in knowledge-based sectors such as (e.g.) pharmaceuticals, electronics, software …etc. But the problem is that the success of this strategy relies to a great extent on the very low corporation tax (12.5%, as opposed to 25.7% on average across the Euro zone, almost 30% in Germany, and over 33% in France). And this is something that may be challenged in the near future as part of the EU/IMF bail-out package that is currently negotiated. As noted in a post from yesterday by Rob Kitchin, the IMF has indicated in its position paper on structural reform in the Euro area that harmonization of macroeconomic policies should be a priority in the Eurozone, and an harmonization of the corporation tax across the area, or at least some degree of convergence, is not to be excluded. This does not mean that firms are necessarily going to massively flee out of Ireland if the corporation tax is raised by a few percentage points. While the potential short-term negative effects of raising the corporation tax has recently been discussed by Chris van Egeraat in another post on this blog, there are also a series of factors that make firms more locally-embedded than implied by the hypermobility of capital argument mobilized by those in favour of maintaining a low corporation rate in Ireland. I’ll leave that aside for the moment, and I will pick up on another point raised by Chris van Egeraat in his post and many others in the past few months, which is the fact that Irish recovery and a viable Irish economic model cannot be built upon a low taxation model. It needs to be rebuilt on strong foundations, including a proper industrial policy, that would send the right ‘signals’ to global markets and international investors, i.e. the image of an economy that is actually managed and doesn’t threatened to spiral out of control again.

A major problem here is that it is going to be very difficult for Ireland, but also Greece, Portugal and Spain to build the foundations of a strong economic model with the austerity plans that are currently being designed or implemented because the priority being the reduction of national deficits through major cuts in levels of public spending, this leaves close to nothing to support these sectors that could create a solid base for these economy (e.g. textiles in Portugal, food industries in Spain and Greece, new technologies in Ireland). That includes, for example, continuous funding for education to keep training indigenous youth, mentoring and internship programmes to help graduates enter the workforce, financial and structural support for start-ups to create jobs ….etc (as discussed in this post for example). If their respective economic bases do not solidify in the next few years, all four countries are likely not only to be prone to future crises of the sort that we are dealing with right now.

Delphine Ancien