Irish Bubble Economy Wake-Up Call To Malaysia
PM Najib wants Malaysians to have high income earnings, ETP, NKEA, NKRA...whatever. Before Najib really embarking economics expedition so confidently, the Irish bubble economy without strong economics fundamentals backing should be a wake-up call to Malaysia.
Ireland, a country to which nearly 40 million Americans can trace their ancestry, is on the brink of insolvency and a loss of sovereignty.
In the 1990s and the early part of this decade, Ireland's growth rate had earned it the nickname of "the Celtic Tiger." Supported by EU budget assistance, low corporate tax rates, and a labor force boosted by a spike in the working-age population, it became a key European location for U.S. foreign investment. The economic story of the 1990s was largely about export growth, but the growth of the mid-2000s, by contrast, was driven by large-scale construction and real estate investment utilizing historically low interest rates.
Nearly all of this boom was financed with borrowed cash. From 2003 to 2007, the Irish banking system imported funds equivalent to over 50% of the nation's Gross Domestic Product, thus triggering a runaway real estate and construction bubble.
Cheap loans, with a tacit nudge by the government, were virtually forced upon the Irish people. Mortgages amounting to 120% of the cost of overpriced apartments were taken out, with the cash left over used to purchase new cars or other consumer items. Consumers became dangerously indebted, as Irish household borrowing (2009) stood at $43,200, nearly twice the eurozone average.
Politicians, heady with the gusher of tax receipts this boom created, could not control their penchant for spending, as their salaries and pensions, as well as entitlement spending, were dramatically increased. Public-sector employment grew by a staggering 40% since the year 2000.
New hotels, offices, and shopping centers (which were not needed) sprang up throughout much of the country. There appeared to be no end in sight as the government and banking system worked hand in hand promoting policies that created a massive financial bubble.
The world financial crisis put an end to these excesses, and the boom came to a halt practically overnight. Today, the unemployment rate is over 14% (one third of all men under 24 are unemployed), and defaults on mortgages have hit epidemic levels. The banks have countless loans on their books that are no longer being serviced, and the underlying collateral is virtually worthless. The Irish government has had to bail out or nationalize numerous banks, the final cost of which is yet to be determined.
Tax revenues to the government between 2008 and 2009 dropped by 19%, and the annual budget deficit as a percent of the GDP hit 15.4% versus an average of 1.1% from 2003-2008. In 2010, the deficit may well exceed 20% of GDP. In only two years -- 2008 to 2010 (est.) -- the general government debt will go from 44% of the GDP to nearly 80% (a phenomenal 82% increase).
The Irish government has had to turn to the international market to sell bonds to finance part of this debt for the cost of bank bailouts -- which alone could exceed 175% of GDP. The banking sector has become the Achilles heel of Ireland.
In an effort to continue receiving support from the European Union and to have the markets, the European Central Bank, and the IMF buy their bonds, the Irish government has been forced to make severe cutbacks in expenditures -- particularly wages and salaries in the public sector and reductions in some social spending. However, these savings will not be enough, and the current government is in a stalemate as it prepares the budget for next year, reluctant as it is to take the draconian steps necessary (even reducing politicians' pay and pensions) if it expects to receive additional loans on the international capital markets.
Dublin has the cash on hand to get by for another six months; however, the most urgent problem is not the short-term solvency of the state. It is the solvency of the Irish banking system. If the Irish banks collapse, they may well trigger bank failures across Europe. This scenario has caused no end of angst among European and international leaders.
The world financial markets have been forced to calculate the very real possibility of what will happen if Ireland goes bankrupt trying to prop up its banks (over $65 billion to date). The European Central Bank has refused to lend any more money to the hollow shell that is the Irish banking system. Thus, the Irish government is more on the hook than ever to continue funding the banks. This has created in the market a deep mistrust of the ability of Ireland to avoid a default -- hence the high interest and premium rates on new bond issues (which also impact the rates paid by Spain, Portugal, and Greece, all also in a severe debt and insolvency situation, which sets the stage for a potentially disastrous ripple effect).
Ireland has been pressured to borrow money from the European Financial Stability Facility to raise the Irish banks' equity and calm the bond markets to benefit other countries. Doing so would be an insult to the Irish people, whose incomes will be mortgaged to pay the loans back, and the EFSF and the European Union will be a in a position to dictate tax and spending policies to government of Ireland.
On November 18, 2010, the Irish government turned to the European Union and the International Monetary fund for a bailout of "tens of billions" of euros.
By turning again to a government solution (solvent EU countries lending to peripheral ones to support European banks on the whole) rather than allowing their financial institutions to fail on a predetermined basis and be acquired by large, well-capitalized ones, Ireland only pushes off the inevitable day of reckoning. This game of bailout on the sly cannot be continued for much longer; there is not sufficient state capital to do so.
In the meantime, the Irish people, who trusted in their leaders, their banking system, and assurances made to them by the European Union, will bear the brunt, as their country will now be subject to the vagaries of bureaucrats in Strasbourg and various capitals throughout Europe. The Irish people, who for centuries struggled against England for independence and to preserve their culture, deserve far better than this, as they will struggle for years, and perhaps decades, to get out from under these burdens.
The Irish experience should also serve as a wake-up call to Malaysian citizens, as many leaders around the world and in the United States are determined to create a new, highly centralized global financial system and government with the stated goal of ending state sovereignty.