Mark Lamb | Sunday, 19 April 2009

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The Tiger’s tale

Weekly international investment round up to 14th April 2009

The first eurozone country to fall in recession last year has just seen all twelve of its banks downgraded by Moody’s the rating agency. This closely follows S&P’s decision to downgrade the country’s sovereign credit rating from the highest available ‘AAA’ to ‘AA+’.
Facing deep problems Ireland held its second budget in six months last week in a desperate battle to stop its economy sliding into further trouble and also as an attempt to reignite what was previously one of the EU’s brightest stars whose booming economy was once referred to as the ‘Celtic Tiger’. The unfortunate adage which has been making the rounds asking: ‘What’s the difference between Iceland and Ireland? The letter ‘r’ and six months!’ is beginning to have a hollow ring of truth to it.
In my June 2008 article entitled ‘Bitten by the Tiger’ written just after Ireland had rejected the Lisbon treaty, I painted a rather gloomy picture for this beautiful country. In the article I highlighted how the main Irish stock market had fallen by 26% in 2007 making it one of the worst performers in Europe and with the building industry accounting for around 14% of the Irish economy I had stated any further slowdown in this sector would have a serious knock on effect to their economy as a whole.
Moody’s decision to now downgrade the country’s major financial institutions was based upon their apparent exposure to bad debts. For example, the country’s largest bank, Allied Irish, is owed approximately €47 billion by building developers and property investors while all of the other Irish banks are also being hit by increasing levels of defaults.
Irish property owners have seen their house prices fall by nearly 18% from their peak at the beginning of January 2007 according to Investment Property Databank Ltd., while commercial property plummeted by 37% last year alone. Another worrying trend for the Irish government has been the increasing numbers of unemployed with official figures now showing 11%, the highest figure in thirteen years.
Last week’s emergency Irish budget measures saw a sharp rise in taxes and a cut in spending which has led to protests from those there who believe the banks and developers are dumping their mistakes on to the average hard-working person but with the worst deficit in the eurozone Irish Prime Minister Brian Cowen has had little choice but to take some drastic measures.
However, in contrast to their British neighbours the Irish are taking all measures possible to avoid nationalising their banks and will now become among the first to establish an agency to take over the toxic debt in their banks, mainly made up of property backed investments, modeled on a measure introduced by Sweden back in the 1990s.
Following last years rejection of the EU’s Lisbon Treaty the Irish government is attempting another vote this year but just like an ironic limerick, the anger of the Irish electorate may again be targeted towards this treaty whilst acknowledging that actually, the real positive difference between their predicament and Iceland’s remains Ireland’s membership of the EU.

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