Irish Eyes

I recently returned from my first-ever visit to Ireland, where I attended the wedding of my wife’s youngest sister. I loved the people. (Except for one woman at the US Airways check-in at Dublin airport.) My world-traveling kids decided the Irish are even nicer than the Kiwis, the always-friendly New Zealanders.

The financial crisis hit Ireland early, as that small country (less than 6 million inhabitants) saw its runaway property bubble burst. Being among the first to go bust was not an advantage. The major player in Irish mortgage lending was Anglo Irish Bank, which drew on credit lines from larger banks in France and Germany. In fall of 2008 Ireland made the decision to bail out its banks. At that time, the European Central Bank demanded that Ireland make whole the foreign banks whose reckless lending helped fuel the Irish property bubble, in effect bailing out foreign banks and hanging their bad debts around the necks of future generations of Irish taxpayers.

Ireland’s lousy debt deal contrasts with that provided to Greece, whose behavior has been altogether more irresponsible. Holders of Greek debt have had to accept an 80% haircut on the principal value of their loans. In the aftermath of the global financial crisis, the perception in Ireland is similar to that in the United States – that some of those most responsible have paid the smallest price.

In three years, Ireland’s government debt has exploded, from 25% of GDP in 2007 to 95% in 2010. Unemployment in Ireland has spiked from below 5% to more than 13%, and GDP has contracted by as much as 20%.

Yet nobody in Ireland is rioting. Despite wrenching austerity measures, the Irish seem determined to get about the business of doing business. One gentleman I spoke with over a glass or five of Jameson’s at a wedding dinner told about one of his nephews, who has built a massively-successful global software business. He told me, “The Irish, you see, can talk to anyone. We are able to get along with people from every culture. And we all work hard.”

I have two principal takeaways from my week abroad in the Emerald Isle:

First, numbers tell only part of the story. There can be key cultural and economic differences between nations whose debt and deficit patterns appear similar. Ireland appears to me to be in a process of long-term recovery, unlike Greece.

Second, it is easier to recover from an asset bubble than an entitlements crisis. Ireland had the former. Greece has the latter. Spain has both. The pain of austerity is as real in Dublin as it is in Athens or Madrid, but the psychological challenge is greater for populations whose essential belief is that someone else owes them a secure lifetime job with a guaranteed income (Greece, Spain) than it is for someone who feels responsible for their own economic outcomes (Ireland).

There is also a potential investment implication. Given that much of the developed world is in a long-term process of deleveraging, and that few countries have yet addressed their entitlements crises, the possibility of future market instability is real. If we experience another financial markets meltdown, which fire-sale assets might a savvy investor buy? At a similar price, I’d much rather own Irish assets (stocks, property) than Greek or Spanish assets.