The Pluck of the Irish

March 17, 2010 — -- As Irish Americans mark St. Patrick's Day with bagpipes, parades and profound displays of drunkenness, mother Ireland finds herself suffering from one nasty economic hangover.

Irish financial institutions, not unlike those in the United States, overindulged during the past decade, lending hand over fist in a bubbly real estate market and leveraging balance sheets to the hilt. And like those in the United States, Irish banks, most dramatically Anglo Irish Bank, needed government assistance after the party ended.

Unlike their American counterparts, however, Irish bankers, political leaders and citizens have, for the most part, come together to do whatever was necessary to climb back up off the floor, including across-the-board spending cuts.

Ireland, fittingly, is starting to see some green shoots.

"We've still got a long way to go, but I think some of the hardest belt-tightening decisions have been made," Dublin City University finance professor Brian O'Kelly said. "People here are optimistic that we've turned a corner."

The optimism is shared by Kevin Gardiner, the Barclays analyst who is credited with coining, in 1994, the famous "Celtic Tiger" moniker for the Irish economy.

Speaking at an investor conference last month in Dublin, Gardiner said Ireland's debt-burdened economy is stabilizing and may return to growth in the second half of 2010, according to a Bloomberg News report.

"Slowly, [Ireland] is starting to stabilize," Gardiner said. "Having seen a huge fall, maybe [it] will see a period of stability in 2010 and some growth in the second half."

Swift, tough decisions, such as the slashing of pay for Irish civil servants, have drawn accolades from financial markets and European leaders facing similar financial straits, the Wall Street Journal recently reported.

"Sure, the unions grumbled," O'Kelly said. "But people here sort of collectively realized that it had to be done and that to get through this period we all needed to work together."

The Irish economy roared for the better part of the past two decades, a darling developing market fuelled by a technology and pharmaceutical boom in the 1990s. Ireland's unemployment, historically double digit, fell, at one point, to as low as 4 percent.

The expanding economy produced a new generation of wealthy citizens, a phenomenon that subsequently gave way to a real estate boom, which, in turn, attracted hot money from more developed European investors looking for growth opportunity and higher yields.

But following its own real estate and credit crisis -- two "rogue" banks in particular, Anglo Irish Bank and Irish Nationwide, wrote down tens of billions of Euros in bad loans -- Ireland has a new economic moniker, one it shares with its fiscally challenged European neighbors to the south.

Ireland, along with Portugal, Italy, Greece and Spain, is now seen as being part of the European "PIIGS" sovereign debt crisis that threatens to plunge the European Union into recession.

"Ireland's growth was fuelled by unprecedented debt," said Irish-born money management executive Ciaran Spillane, who is head of U.K.-based Newton Capital Management's North American business. "Now comes the deleveraging period, which probably means a protracted recovery."

"When the U.S. credit markets completely locked up in 2008 after Lehman collapsed, it was like an earthquake that shook the entire world," said Gregory Connor, a finance professor at the National University of Ireland, Maynooth, in County Kildare. "The economies with the worst foundations sustained the most damage. Ireland was overleveraged."

Ireland's real estate and construction industries, which by 2005-06 had replaced the technology sector as a means for bankers and investors to ride the Celtic Tiger, came to a screeching halt in 2008, ending a boom during which Ireland's economy, as measured by gross domestic product, doubled over the course of the decade.