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The Irish Bailout Explained

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United Kingdom  Ireland  Government Bonds  Eircom  Irish Bailout  Government Lending  Irish Rescue Package  IPOs  Ghost Towns  Investment Variables 

The Irish Bailout Explained

By - Monday 22 November 2010

It's been a tough year so far economically for large parts of the developed world. Talk of bubbles, crashes, double-dips, negative equity and bail-outs have been non-stop in most media streams.

Technology has made it all the more easy for everyone to have an opinion too. As a result - everyone believes they have the answer and everyone else believes their answer is better than the first. Not that this is a bad thing. There is a lot to be said for free speech and all that, but it does come at a price sometimes.

It usually starts with the press blasting out headlines like Coalition spends 200m pounds on yoga and pet food on the front page, only to reveal (rather disappointingly) that the government has not actually gone and bought 199 million cans of Pedigree Chum and a year's sign-up to Madam Pings School of Yoga. Stories like this obviously lead to a barrage of comments on the site, the vast majority of which end up in arguments based upon something that isn't true in the first place, helping no-one and possibly causing panic buying on dog food.

On a more serious note, one has to question quite whether all this "reporting" and subsequent "commenting" is really doing the economy at large any good at all. Of course if the government has been squandering vast amounts of cash feeding the worlds largest dog, yes, the public should know about it, but the big story at the time of writing this is the Irish bail-out package.

Most of the country (UK) is saying it's not fair, suggesting the Irish be left to drift off into the Atlantic, and the UK should hold onto the 7 billion it has just scraped up in austerity cuts and dog food bills. Many are citing the problem in Ireland as being down to excessive lending in the form of mortgages which has resulted in "ghost towns" in many parts of the country. Whilst the frivolous lending is a fairly large part of the problem, it's not the only reason Ireland is in the situation that it is. Several other factors need to be taken into consideration here.

Wind the clock back to the late 90's. The Euro was still a magical pipe dream currency and the internet was far from mobile. Financially times were not the greatest ever, but they weren't bad either. All of a sudden in Ireland, several companies started to go public and list on stock exchanges in the form IPO's (Initial Public Offerings). One of the most well known floatations was Eircom, an Irish telecoms provider. In this particular case, everyday customers of Eircom where issued shares simply because they were customers, and offered the option to top up their holding pre-launch if they wanted to.

Sounds like a great deal, especially since the floatation of BT and British Gas in the UK had apparently been a roaring success having been hugely over-subscribed.

One would think the tale would continue somewhat predictably to a "happy ever after" style conclusion, but this was not to be. Eircom stock yo-yoed its way on the market and led to a large number of people complaining about it and the poor returns.

It could be said that bad timing could be to blame, and to some extent it was. The equities market had arguably been flooded with IPO's of all shapes and sizes, and the market had had enough. A slightly deeper look into the issue though (as Eircom later realised) shows that the somewhat idealist distribution of it's stock was largely to blame for its poor performance - basically a large proportion of its shareholders were given stock that had no previous experience of stocks and shares trading. Whilst the holders were mostly thinking "isn't that nice?" and on paper, many were all of a sudden very wealthy, but with no real idea of what to do or how to realise this new found wealth.

Whilst the Eircom debacle is only a small blip in the Irish economy, there is nevertheless a lot to be learnt from it. Ireland, (shortly after Eircom) started to attract software companies, and did happen to survive the dot com crash fairly well. Having survived it though, Ireland's IT business is not at its best at the moment, largely down to developers moving on and staff costs getting too high. With staff moving on, the industry struggles. Inbound investment begins to slow, and sure enough, the influx of foreign cash begins to dry up. Whilst all that has been going on, the banks are busy in the background creating no end of wonderful lending products as house prices are driven skywards off the back of this new-found apparent wealth. As a result, the beast created is one that rapidly dies if you don't keep feeding it.

Don't get me wrong, many and every effort has been made to try and keep this Irish version of the Loch Ness Monster afloat. The Irish government sold bonds, which foreign banks bought. Bonds in theory are one of the safest investments in stable times. They are in essence the government's way of raising cash to support development, with a promise to pay it back at a later point with a reasonable premium. The problem is though, is we are not in stable times.

The UK has bought in to this whole affair, thinking there is a quick buck to be made. The result however is a different matter. With so many bonds issued, and the bonds maturing, the money simply isn't there to pay them out. If the Ireland isn't bailed out, the bond holders don't get paid. As much as it sounds like a "throwing good money after bad" situation, the reality is if they are not bailed out, no-one gets any money and eventual anarchy ensues. In essence, (and this situation applied to the Greek bail-out too) "your investment in bonds is in the toilet. We can flush, or you can send more in the hope that we can rescue it and pay you back".

The general comment about the whole Irish bail-out seems to be "it's not fair" and "it shouldn't happen". The bottom line is unfortunately there is no choice. A speculative choice it might be, but, a choice that has been made by the powers that be. If the bail-out isn't done, UK lending will simply be restricted for even longer and growth will be even slower, if at all.

Although the shouts of "we shouldn't be in this situation!" are correct, the fact of the matter remains that we are, and you can only deal with what is, and not what isn't. House prices will still take a while, but comparing house prices every 5 minutes won't change that. When it comes to investing, whether you are the buyer of a gold coin, an investment banker, the Chancellor of the Exchequer or indeed the head of acquisitions for a blancmange manufacturer, there will be bad times. You cannot have good times without them. Thinking about bad times won't change them either, anymore than thinking your way out of a storm on a ship - it just isn't possible. Keep calm, and try to ride it out, when all is settled, learn from the effects of unknown variables and start again.

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