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Tuesday, 30 September 2008

Irish response

In the first Presidential debate, Sen. McCain said US corporation tax is too high, compared for example to Ireland (zero tax rate on exporters in the '70s and now only 12.5% on multinationals). Apart from this being like an elephant envying the flexibility of a rodent (Ireland being economically equivalent to only one of the smaller of the USA's 90 major conurbations, or economically the size of Iowa) it is officially the first EU15 state in recession (though that estimate is subject to revision).
Now, it is also leading the way in making a unique response to the financial crisis. This follows after Irish banks suffered their biggest one-day fall in shares for 20 years, yesterday, Monday. Anglo Irish, the specialist property lender, fell 45%, Irish Life & Permanent (a bancassurer and Ireland’s largest mortgage provider) fell 34%, and Allied Irish dropped 16% and Bank of Ireland lost 15%. Further to a recent tripling of depositor protection at all banks to €100,000, this protection is today extended to guarantees of an estimated €400bn of liabilities (about double Ireland’s GDP), covering not only retail, but also commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.
This is aimed at easing the banks’ short-term funding, which had seized up. The deposits covered (until Sept. 2010) are at Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and Educational Building Society Shares in the 3 biggest banks rose sharply in early Dublin trading - Allied Irish up 20%, Anglo Irish up 41.3%, and Bank of Ireland up 19.3%. ”The guarantee is being provided at a charge to the institutions concerned and will be subject to specific terms and conditions so that the taxpayers’ interest can be protected,” the government said in a statement. Brian Lenihan, the finance minister, said the guarantee would make it easier for Irish banks to access funds. ”Since the collapse of several institutions in the US, it has been very difficult to access funds on international markets for Irish banks,” he said. “This will present real problems for the Irish economy if it is not addressed.”
In much larger economies the authorities sometimes allow a bank to fail pour encourager les autres, but that is not likely here. The public is also exposed via falling house prices of course, via the stock market (pensions etc.) and direct and indirect as bondholders. Most Irish equities are foreign-owned and so the market is vulnerable to the global bigger picture, which is confused and hence it became necessary for Ireland to make its own decisive move. No governments elsewhere have offered protection for bondholders and investments in shares in banks’ bonds by pension funds etc.; shareholders remain at full risk. I have every confidence in the government and the financial regulator, why 20% of my liquid portfolio continues to reside in Irish banks.
The Irish government is finalising its October Budget. It is mindful of the idea that a failed banking system is a failed state and that there was some cricism of the fact that Irish banks required as much of the ECB's liquidity window as Spain! Ireland recognises it has to find a solution of its own when the rest of the world appears to be stumbling from one intervention to the next, hence the innovation of a wider deposit cover (albeit that the banks have to also pay towards this). The Irish Government has one of the lowest Government Debt/GDP ratios in the EU (one benefit of being in the EU currency zone, albeit that private external debt/GDP may be relatively high?). Ireland has a high soverign credit rating, but credit ratings, as we have seen, are vaporous in a liquidity crisis, and like everywhere else banks' liquidity, despite ample credit risk grades, is in precious short supply. It also has, in common with other credit boom economies, a high trade deficit of 8% ratio to GDP, compared to UK at 6%, Spain and 5%, but Greece at over 10%!

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