Ireland's financial woes contrast with our own bright outlook

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The Gazette, Monday, December 6, 2010

The housing bubble and the financial crisis have the Celtic Tiger on the run, and there is no telling how Ireland's cautionary tale might end.

This much we know: Housing prices have fallen by about 50 per cent in Ireland since the great crash of 2008, and nearly 20 per cent of the country's housing stock is vacant, making Ireland a kind of Potemkin Village.

As in the United States, the bursting of the housing bubble pushed the banks to the brink. But unlike the U.S., where Washington pumped liquidity into the market by lending Wall St. $700 billion, the Irish government assumed ownership of more than $40 billion of debt. So it was with the country itself on the verge of insolvency that Ireland is getting a euro-bailout of 100 billion euros (or $133 billion.).

In a country of 4.6 million people, with a GDP of $222 billion and shrinking, that's a pretty scary number.

Consider Canada, by comparison: With a population of 34 million and 2009 GDP of $1.3 trillion, six times the size of Ireland's. The equivalent bailout in Canada, adjusted for the euro-exchange rate of $1.34 per loonie, would be $800 billion.

In a single stroke, the government would more double the federal debt of Canada.

You can imagine what the voters would think of the government, let alone the banks, that got them into such a mess. The brand equity of the party in power would be ruined for decades, and no one would ever trust the banks again.

But of course, that isn't Canada's situation. Our financial system, and our fiscal framework, are the envy of the world. For the third year running, the World Economic Forum rates the Canadian banking system the strongest in the world. Four of the Big Five Canadian banks are now among the top 10 in North America in terms of both market capitalization and assets. We are now in earnings season, and RBC has just reported a profit of $5.3 billion for the year ended Oct. 31.

Our banks are the envy of the world because by and large they didn't do disco banking, bundling mortgages into derivatives and selling them to third parties in Iceland. They carry mortgages on their books, they require down payments on mortgages, and they know if you miss a payment. When the bubble burst, and housing prices plunged, the debt on a house became worth more than the house. The result was the stock market crash of 2008 and the deepest synchronized global recession since the end of the Second World War.

But even in the worst moments of the Great Recession, when liquidity was an issue, the Canadian banks never drew a nickel of $150 billion of standby credit set aside by Ottawa in the 2009 budget. This is why boring Canadian bankers are now rock stars at international financial conferences.

The Canadian fiscal framework and labour market picture is also a happy story, especially when compared with Ireland, a country in deep financial and economic turmoil.

Ireland is experiencing deflation and negative GDP growth, down 7.1 per cent last year. The Washington Post put up a chart last week projecting a current Irish deficit of 32 per cent of GDP for 2010 -this in a country that had a surplus as recently as 2007.

That's definitely a structural deficit, and the graph looks like a Nortel hot chart on the way down. By comparison, Canada's cyclical deficit is three per cent of GDP, on its way back to balance by 2015 at the latest.

Unemployment in Ireland is 14 per cent. Ours, StatsCan reported on Friday, is 7.6 per cent, meaning that all the jobs lost in the recession have been recovered.

It's the unemployment number that leads to the next one: People are leaving Ireland again. Twice as many people are leaving as are moving there, and outward migration of nearly 35,000 is predicted for 2010.

Some of them, among the most educated and literate people in the world, will come to Canada. They haven't been driven out by famine, as their ancestors were in the 1840s, but rather by fools. In this sense, Ireland's loss might once again prove to be Canada's gain.

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