Will Ireland Be Luckier than Iceland?

Mar. 2.09 | About: The Governor (IRE)

By Kindred Winecoff

The Celtic Tiger has been battered badly by the economic downturn, and like Iceland this is largely due to the fact that its banking sector is a very large part of its overall economy. Some companies are running "economic disaster tours" and they've even got their own Dr. Doom! Perhaps most importantly, Ireland and Iceland have similarly-spelled names.

But, as the saying goes, the Irish fundamentals are more sound than those of Iceland:

O'Neill and other prominent economists like Patrick Honohan, a former economist at the World Bank who teaches at Trinity College Dublin, argue that Ireland will never go the way of Iceland because Ireland's public debt is a manageable 40 percent of gross domestic product.

Ireland's banking sector, more than twice the size of the national economy, does not even approach that of Iceland, they note, which was about 10 times the size of its economy.

Still, Ireland's amazing recent run of economic growth was largely attributable to profit increases in the banking sector, which used derivative positions in real estate markets to make highly leveraged bets. Those bets weren't on American subprime mortgages, but rather in European real estate markets, but the real estate bubble may have been even more puffed up in Europe. Expected profits have gone way down as defaults has risen, the banks are over-leveraged, and counterparty obligations have spread the contagion throughout the entire system. Same story everywhere.

However Ireland was much less exposed than Iceland, so it seems very unlikely that the luck of the Irish will be better than that of the Icelandic.