Saturday, August 4, 2012

Ireland: in the land of the blind the one-eyed man is king

As discussed yesterday, the Eurozone manufacturing sector is in a recession, with all but one of the larger nations experiencing a contraction. That one nation that is bucking the trend is Ireland. Ireland was hit hard by the financial crisis in 2009 - before Greece and Portugal came on the scene. It took a complete recapitalization of the banking system via "bad bank" structure called Irish Bank Resolution Corporation (IBRC) that saddled Irish taxpayers with bad commercial real estate loans and properties they had to take over in order to recoup some of the losses. The government and IBRC had to borrow heavily from the IMF/EU and the ECB to execute the bailout plan. The taxpayer-owned properties are still being liquidated and the government is still trying to deal with all the debt it took on in order to complete the bailout.

Many argue that Ireland should have imposed haircuts on holders of senior unsecured bank bonds to reduce the burden on the taxpayer. Part of the problem was that it took some time for the authorities to fully value problem loans and to understand the full extent of the bank losses. Some thought that wiping out the common and preferred equity would be sufficient (which it clearly wasn't).  Plus the holders of senior bonds were mostly other EU banks. Fearing a shock to the banking system, the EU leadership pressured Ireland into making the bondholders whole at the expense of the taxpayers. Many in Ireland have been outraged by this and the e-mails we've got on the topic indicate that if the nation could do this over again, they would definitely impose such haircuts.

However having dealt with this extraordinarily costly bailout in a relatively decisive manner (something that Spain desperately needs), Ireland is gradually putting the crisis behind it. To be sure there are tremendous obstacles to overcome including high unemployment, weak property markets, and a difficult fiscal situation.

Ireland unemployment rate  (source: Bloomberg)

But the manufacturing PMI numbers show real promise that Ireland may be on the way to recovery.

Source: Markit (click to enlarge) - note that PMI below 50 generally indicates contraction

And market-based indicators also look quite good. Irish government yields have declined even in the face of Spain's escalating crisis. The spreads are still elevated, but are now less than half reached during the peak of the crisis last year.

Ireland 9y (benchmark) yield  (source: Bloomberg)
Reuters: - Ireland's surprise issue of medium-term bonds last week, the first by a country in an EU/IMF bailout program, capped a stellar year in the bond market in which the premium investors demand to hold its debt over Germany's shrank by 60 percent.
Ireland's stock market is up 10.8% year-to-date (including dividend) and has done reasonably well even against the DAX over the past year.

Irish index vs DAX over the past year  (source: Bloomberg)

Even the fiscal situation is beginning to improve.
Reuters: - The Irish government was ahead of its revenue goals at the end of July, keeping it on target to meet its 2012 deficit target under its EU/IMF bailout, but the government said it had spent slightly more than it had planned.

Tax returns were 2.5 percent, or 500 million euros ($607.98 million), ahead of target in the first seven months of the year, with income, value-added and corporation tax receipts all better than planned, the finance ministry said in a statement.
Of course given the horrific economic conditions across the Eurozone, it doesn't take much to stand out.
Reuters: - "Most of the numbers are pretty bad, there's a depression in domestic demand and the banks balance sheets are still damaged," said Stephen Kinsella, professor of economics at the University of Limerick.

"But if you look at our yield performance next to Italy and Spain, you start to see Ireland in a more favorable light," he said. "In the land of the blind the one-eyed man is king."
And tremendous risks still remain.
Reuters: - The country's prospects now depend on promised concessions from Europe outweighing the drag which the euro zone recession is having on Ireland's key export sector. Merchandise exports to the euro zone fell 5 percent in the six months to June, but total exports were up 3.8 percent.

Another major risk is that the government will be forced to pick up the tab for large new losses on property loans at state-owned banks or the National Asset Management Agency, which is bidding to recoup 32 billion euros it paid for bad property debts.
But Ireland has a four-year head start over Spain and Italy in dealing with the crisis. Slowly but surely the nation is pulling ahead of the other Eurozone nations and may in fact be on the way to recovery.
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