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Can the Celtic Tiger Regain Its Stripes?

Ireland has been lumped in with the eurozone's weakest economies, but that undermines the country's strong fundamentals, analysts say.

Ireland, once known as the Celtic Tiger for its explosive economic growth from the mid-1990s until roughly two years ago, is now known for its high fiscal deficit as eurozone contagion concerns have hit a boiling point.

At 14.3% of gross domestic product in 2009, Ireland's deficit surpassed Greece's -- at 13.6% -- as well as Spain's and Portugal's, which were 11.2% and 9.4%, respectively, in 2009.

However, as several analysts note, Ireland's outsize shortfall reflects supportive actions taken by the government to shore up the domestic banking sector, which suffered from heavy exposure to an overvalued property market.

Video: Celtic Tiger Looks to Awake From Slumber >>

The bubble's bursting brought an end to the country's giddy boom years and heralded a new period of stark austerity that other debt-bogged eurozone countries are now seeking to emulate.

Eurozone angst, which has beset global markets in the past month, fails to differentiate between the individual circumstances of the European Union's weaker members. However, analysts monitoring the situation emphasize that while several of these economies share high deficits relative to gross domestic product, their fundamentals vary greatly.

Concerns that these EU "weak spots" are all facing a fate similar to Greece is an oversimplification, according to FitchRatings analysts Brian Coulton and Paul Rawkins, who believe that the Greek crisis is not so much an economic one as it is a failure of fiscal management and fiscal policy credibility.

"Taking the last 15 years as a whole, Greece's fiscal deficit has on average been easily the highest of the GPSII

Great Britain, Portugal, Spain, Ireland, Italy countries' -- at 5.7% of GDP -- despite it also enjoying one of the fastest economic growth rates, underlining the weakness of its fiscal discipline," Coulton and Rawkins wrote in a recent review of European contagion risks. "Policy makers in Portugal and Italy, on the other hand, have contained fiscal deficits much more effectively than Greece despite far lower GDP growth rates, while robust growth in Spain and Ireland was accompanied by a sharp pay-down in government debt levels to well below European Monetary Union averages by 2007."

For Ireland, its previous life as the Celtic Tiger is now serving as a boon to its economic outlook. The same strengths that helped make it one of the most affluent members of the European Union -- the combination of an extremely favorable corporate tax rate and a highly educated population that attracted investment from high-profile companies such as


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-- are what economists are counting on to drive the country's future growth.

Barry O'Leary, chief executive of IDA Ireland, which concentrates on encouraging direct foreign investment in the country, is bullish on Ireland's growth prospects -- and quick to reject the notion that it could be the next Greece.

Barry O'Leary

"We have a very, very strong representation of foreign direct investment, particularly from U.S. corporations. They're coming here because of the talent, because of the tax, the technology capability, the strong track record and the demographics of the population in terms of future growth. We have, by European standards, a very, very young population," O'Leary said. "In some of the other countries, you're talking about people retiring in their mid-50s."

The IDA focuses on furthering foreign investment in industries that are high on the value chain, including the life sciences, technology, financial services, digital content, engineering and clean tech industries. The caliber of companies investing in Ireland are enviable: IBM,


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, eBay,





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GE Healthcare

-- sector heavyweights in growth mode.

In O'Leary's eyes, that's enough to differentiate Ireland from some of its problem peers.

"They don't have the modern technology or the industries that we do -- nor have they proven that they're prepared to take the type of difficult decisions that the Irish government did."

When Ireland's deficit ballooned, the government swiftly enacted harsh budget cuts that, in addition to significant reductions to social program spending, lowered state employees' salaries by anywhere from 6% to 30%, according to O'Leary.

"While nobody is happy about it in Ireland, you haven't seen the mass protests that you have seen in other countries, so there is this firm commitment in terms of driving down government spending," he said. O'Leary believes that Ireland's willingness not to shy away from painful cutbacks will count in its favor as far as the future of its sovereign debt rating is concerned.

"One of the things the markets has been looking at very closely is: What are the things that Ireland has been doing in terms of adjusting to the new reality in terms of its deficit? Going back to late 2008/early 2009, the Irish government has set out a pretty clear road map and pathway to reducing expenditure to bring the deficit back into line. They've delivered so far," he said, adding, "So long as we keep implementing what we've said we would, I think the rating agencies will probably work out OK."

But even with a solid plan in place and support from government and citizenry alike, reducing the deficit won't be easy. According to FitchRatings analyst Douglas Renwick, Ireland's banking system was one of the worst affected during the global crisis.

"Poor lending standards and negative real interest rates led to a near-tripling of the banks' aggregate loan book from 2003-2008, leaving them highly exposed to the overheated property market. The domestic banks were also highly reliant on foreign wholesale funding. From September 2008 onwards, the banks entered both a liquidity and solvency crisis," Renwick said.

The Irish government, however, averted a total system failure by swooping in with bank guarantees, nationalization and recapitalization. And even though the country's domestic banking sector remains its Achilles' heel, ratings agencies believe its diverse, foreign investment-friendly economy and strong export sector bode well for the future. That is, as long as it still has access to European Central Bank liquidity support, which may not be guaranteed with so much uncertainty hanging over the eurozone.

While Tom Graff, managing director at Cavanaugh Capital Management and a


contributor, doesn't believe there's a real risk to Ireland not getting the liquidity it needs, he said it's precisely that uncertainty that gets to the heart of why eurozone fears have had such a tight grip on markets recently: It's difficult to say what would happen if there were a real failure.

"Governments don't have trouble funding themselves as long as they maintain the confidence of foreign investors. I think Ireland has been successful in doing that. Fundamentally, Ireland is a growing economy. I'm not sure the same can be said about Greece," Graff said.

--Written by Melinda Peer in New York


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