The Celtic Tiger Roars

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In 2009, the European Union (EU) and the International Monetary Fund (IMF) teamed up to provide an €85 billion bailout package to Ireland, which was suffering from a severe banking crisis at the time. As in many other countries, Irish banks had become dependent on short-term funding and excessive borrowing to fuel the country’s rapid growth during its “Celtic Tiger” period which ran from 1995 – 2006, with much of the capital coming from abroad.

But two weeks ago, the Irish government announced that it would exit the EU-IMF program, eschewing access to the region’s precautionary credit line program as it reenters the global credit markets in February. It will also repay the loans it has already received by 2042.

Many have marveled at the Irish decision to operate without a safety net, but the government has built up a cash reserve of €20 billion as it raises money in the bond markets in recent months. In fact the Irish sovereign yield of about 4.5 percent—slightly above the yield on German bunds but well below that of Greek sovereigns—was a major driver of the decision to exit the bailout program. Its current cash on hand should allow the government to meet its financial obligations through 2015.

At the same time, after several quarters of negative gross domestic product (GDP) growth, in the third quarter Irish GDP grew by 3.6 percent and is forecast to continue growing through next year. The labor market in the country in also turning around, adding new jobs in the first three quarters of this year.

The government has also benefitted from the fact that it was fairly quick in recognizing its economic programs, creating the National Asset Management Agency—the Irish government’s version of th! e US Troubled Asset Relief Program—which purchased about €81 billion worth of bad Irish bank loans in 2009. In addition to helping to alleviate the capital programs Irish banks were facing, the government has had a fair amount of success in selling off a bit more than €11 billion worth of the loans so far.

Despite the decision to exit the bailout program, Ireland isn’t exactly facing smoothing sailing from here.
The country’s debt-to-GDP ratio has more than doubled over the past five years, reaching 113 percent, a fact that will likely trouble international investors.

The country also is entering the global capital markets, even as it appears increasingly likely that the US Federal Reserve will begin backing off its own easy money policies in the next six months or so. That’s sure to result in rising Treasury rates and, since they are considered the global benchmark, Irish bond yields will have to offer an attractive premium to entice investors.

Ireland has also been struggling against a surprisingly resilient euro which has remained strong against the US dollar, with one greenback currently fetching only about €0.74. The euro has largely been trading on the fundamentals of its core states such as Germany, resulting in a strong currency that poses a headwind for other, troubled member states. That’s particularly true of Ireland whose economy is almost entirely dependent upon exports and tourism even in good times.

That said, a successful Irish reentry into global capital markets would provide a huge lift to the EU. While Ireland’s sovereign yields are only half those of Spain’s and half again of Greece’s, its exit from the bailout would serve as a roadmap for other troubled European economies. Its successful exit will also free up resources that can then be devoted to getting more troubled economies—notably Greece and Spain—back on track.

It will also be an important vindication of the EU&rsq! uo;s emph! asis on what, at the time, appeared to be harsh requirements for key internal reforms that forced debtor nations to bear almost all the pain of recovery. Those reforms have created an uphill growth battle for countries such as Greece and Portugal, which still haven’t quite gotten their legs beneath them.

Ireland’s exit also creates a showdown of sorts between the EU and the IMF. Even as the Irish recovery lends credence to the EU’s strategy, the IMF has begun pushing for a plan that would force bondholders to bear upfront losses the next time a euro zone country requires a bailout. Pointing to the Greek example, the IMF believes that German-driven austerity measures run the risk of only exacerbating the problems.

The relative success of the Irish recovery will only embolden the German-led austerity block, complicating the IMF’s case for a more forgiving bailout mechanism. It also makes it tougher to make the case that different countries require different policy prescriptions to foster a recovery. If the EU were to take a different tack with Greece now, it would be akin to the US government agreeing to bailout California while leaving Illinois to deal with its own mess.

Regardless of the potential pitfalls that still remain, while Ireland’s reentry into the global capital markets won’t mark a return to more halcyon days for the region, if the Irish are successful it only underscores the attractiveness of European markets.