Lots of countries made lots of mistakes during the financial crisis.
However, by far the biggest error was Ireland’s decision to guarantee the debt of all its banks.
At the time it seemed a cunning plan. The idea was that it would prevent a run on the banks – perhaps even poach deposits from their eurozone neighbours – and give them time to solve their problems.
In reality, as the bankers knew only too well, they were hopelessly insolvent, thanks to huge quantities of collapsing property loans.
By the time Dublin realised it had blundered, it was too late. Under pressure from Brussels and Berlin, the government had to pay out huge amounts to bondholders.
The results were devastating. A bankrupt Ireland was forced into the arms of the International Monetary Fund and the European Union. A mixture of spending cuts, collapsing bank lending, and a stubborn desire to stick with the euro saw GDP plunge and unemployment soar to above 15%.
It’s a sorry story. But it’s one that may yet have a happy ending – which is why investors should be looking to get in now…
The Irish economy is finally getting back on its feet
Ireland has had an awful time over the past five years, and it’s not out of the woods yet.
But there are signs that things are turning around. For the last 13 months, the unemployment rate has been falling steadily. It’s now down to 13.3%, the lowest level since 2010.
The housing market is also showing real signs of life. Having pretty much halved following the crisis, prices in Dublin have already up by 11% since last year. While Dublin remains an outlier (not unlike London), even national prices showed a modest improvement of 2.8% in the first eight months of this year.
The pick-up in employment and house prices is translating into rising consumer spending. Retail sales are up by nearly 3% on the year. Consumer confidence has finally returned to pre-crisis levels. Even the pubs, which were gutted by the recession, are starting to see a rise in customers.
Meanwhile, the government’s balance sheet is improving too. The European Central Bank has restructured some of the loans Ireland took out to cover the bank debt, postponing their repayment date. There is even talk of Ireland returning to the bond markets soon.
All these improvements mean the economy is expected to grow by 1.9% next year and 2.5% in 2015.
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Ireland will benefit from British and American growth
One big boost to Irish growth will be exports. As an open economy, Ireland has always depended heavily on trade, especially with nations outside the eurozone.
Its two biggest trading partners are Britain and the US, each of which is more than twice as important to Ireland as Belgium, its third-largest trading partner. This means it is not as dependent on the troubled wider eurozone economy as you might think.
The good news for Ireland is that demand from both the US and the UK looks set to remain strong, at least in the short term. As my colleague Ed Bowsher points out, while the UK government’s efforts to reflate the housing bubble will have long-term costs, rising house prices are clearly boosting consumer confidence, which is leading to rising retail sales.
JP Morgan’s Andrew Goldberg thinks that a similar thing is happening in the US. Recovering property and share prices have lifted confidence, while households have cut their debt levels significantly. This has allowed them to start spending and boost their consumption.
Of course, the Irish export story is about more than Anglo-American growth. Ireland might have made a big mistake with its banks. But it was smart enough not to bow to heavy European pressure to raise its corporation tax rates. That left the country looking attractive to outside investors, which should allow its exports to keep growing strongly. HSBC reckons that Irish goods exports will grow by 6% a year from 2016 to 2030.
This is no return to the Celtic Tiger days – but stocks are cheap
Let’s not get carried away. For all the talk of the ‘Celtic Tiger’, the deficit remains a big problem. The deal over Ireland’s government debt is incomplete and will need to be revised. Joblessness might have fallen, but it’s still a serious issue – the latest forecasts suggest unemployment will remain at around 12% as late as 2015. Even now, it would still make sense for Ireland to quit the euro.
But at the same time, a recovery has definitely begun. And most importantly from an investment perspective, the market still looks extremely cheap. Despite having risen strongly already, it’s only on a cyclically-adjusted price/earnings ratio of six, according to Mebane Faber.
This might be skewed by the bubble years a little, but it’s still cheaper than Spain or Italy, which suffer similar problems. And like those two countries, Ireland will also benefit if the ECB decides to print money, boosting demand and making exports even more competitive.
You can buy the market itself via a US-listed exchange traded fund. However, a more aggressive strategy is to buy shares in Irish Continental Group (LSE: ICGC). ICG, which runs ferries between Ireland and the UK, is already benefiting from the pickup in exports through its container business. After several tough years, it profits are growing at over 20% a year. While it trades on a 2014 price/earnings ratio of 16, it has a dividend of 4%.
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