Ireland's economic woes exaggerated, believes Canadian research team

PESSIMISM ABOUT Ireland’s economic prospects has been overplayed and the economy will rebound much more sharply than consensus opinion believes, according to a new report.

A special report on Ireland by BCA Research, a Canadian-based investment research company which advises international investors on investing in Europe, found that the Irish economy is “much more flexible than its euro area counterparts”.

It predicts that although economic activity will contract by 4 per cent next year, the Irish economy will rebound by 2011.

The report compares Ireland’s present economic situation to that of Hong Kong in the late 1990s. It argues that Ireland’s decision to adopt the euro currency mirrors Hong Kong’s creation of a peg system to the dollar in 1983, which left both with an interest rate structure well below levels dictated by its potential growth rate. This in turn led to rapid economic expansion, an explosion of the property market, and a loss of competitiveness. In a case analogous with Ireland currently, Hong Kong was highly exposed when the Asia financial crisis hit in 1997. But, by 2004, Hong Kong’s economy had begun to recover vigorously.

The report argues that Ireland can mirror Hong Kong’s recovery, but “policymakers must rein in government spending and get the banking system working again”.

Although the report welcomes the creation of a “bad bank”, it believes the current banking crisis in Ireland is worse than the Swedish banking crisis of the early 1990s.

It points out that Ireland has one of the highest private sector debt/GDP ratios ever experienced in the industrialised world; the banks have higher property exposure; and participation in the European single currency precludes the use of a “currency relief valve”.

The report believes that there is a strong case for additional government intervention in the Irish banking system, arguing that, without it, future losses at the Irish banks are “more than enough” to wipe out remaining capital.

On the subject of investment opportunities in Irish banks, it recommends Irish banking debt over bank equities, pointing out that the Government’s decision to buy loans from the banks at “economic value” rather than market value, means that ‘it is impossible to objectively value Irish bank stocks’. In contrast, it says that senior Irish bank bonds remain attractive, offering high yields at lower risk levels.

In terms of government policy, the report recommends that recovery should be dependent on fiscal rather than monetary policy.

The Government should avoid undue reliance on the revenue side in the future, it says. “The biggest gains would be made by further cutting public-sector pay and employment.”