Will Ireland Be Luckier than Iceland?

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.

Comments

[Zoltan L. K...:]

The challenge for both countries is their dependence on financial services. The amount of public debt is only a symptom.

Mar 02 04:49 AM

[Tibcomonkey:]

Your last sentence:- "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." is contradictory. Would you like to correct it?

Mar 02 10:47 AM

[Kindred Win...:]

yeah. 'unlikely' should be 'likely'.

Mar 02 02:14 PM

[tamagoy:]

whew- i was staring at that last sentence for a long time trying to figure it out- u really know how to confuse an irish man!

May 05 04:26 PM

[Senan:]

Looks like at this stage we're not going to suffer the same scale of fallout as Iceland. But Ireland still has several big administrative hurdles to get over before we can think about a recovery. The government are currently putting in place the 'bad bank' scheme (NAMA), there's the Lisbon treaty, and then later in the year the next budget. The masses are not happy at the moment. Other countries have acted much more quickly and decisively, so we will lag.

Sep 25 03:35 AM