International Financial Flows and the Irish Crisis

The readership may be interested in my new paper: here.

12 replies on “International Financial Flows and the Irish Crisis”

I was reading this a while ago. I think Ireland was no different to a bog standard Emerging Market capital crisis once TSHTF property market wise.
In the case of Latin American countries the exchange rates tend to be overvalued -in Ireland the exchange rate was fixed so property went through the roof.

“It is very clear that the adjustment mechanism is the exchange rate,” Vergara says.Like other emerging markets, Chile saw steady inflows during the commodities boom and the years of abundant global liquidity that accompanied and outlasted it. As trade and financial flows have slowed or reversed, the Chilean and Argentine peso and many other EM currencies have weakened.
“And we have lived for so many years in abnormal times with very low international interest rates and capital flows to emerging markets. If you have large capital inflows for too long they can become addictive. “”

“But the important point about crises in emerging markets is that they do not start there. Instead, they are almost invariably triggered by the actions of investors or central banks in the developed world.”

The international banks get their money out and Argentina, Turkey, Ireland, whoever go into rehab.

They can always plámás it up with guff about this great little country or Maradona or the Bosphorus sunset and modernity or whatever but that is the system.

And that conf call with those spivs in London humiliating the lost FF Minister for Finance was an Irish version of what happens all the time in the EM world.

From the paper: Page 8.

“Relative to “sudden stop” episodes experienced by emerging market economies, the cross-border provision of central bank liquidity was an important source of alternative funding that moderated the impact of private-sector financial outfows on the domestic banking system, domestic asset prices and the speed of current account adjustment (see, amongst others, Sinn and Wolthauser 2012, Lane and Milesi-Ferretti 2012, Alcidi and Gros 2013, Auer 2014, Whelan 2014b, Fagan and McNelis 2014).

The Target 2 liabilities for Ireland peaked at 91 percent of GDP in December 2010.The subsequent stabilisation and restructuring of the banking system has generated a sustained decline in scale of the Target 2 liabilities, which had declined to 32 percent of GDP by December 2013”

But the provision of liquidity, when a bank run takes place, is part of the raison d’etre of banks. It is a questionable proposition that a rapid reduction in CB liquidity must be seen as a positive.

The other point, relative to the observation is that the Troika program appeared to have, as its core unstated objective, the reduction in Target 2 liability.
The result was a very rapid deleveraging both in the economy and in particular in the banking system. Much of this deleveraging was achieved by fire-sale prices, with the resultant losses passed on to the State.

The policy lessons, from my perspective, are that unfettered capital flows, in or out of an economy, have a capacity for destruction, that must be shackled.
If any central bank, ECB or otherwise, allows significant credit inflow into an economy, then its concomitant obligation is to ensure that the outflow is managed over a long period of time, and not done at the immediate expense of fire-sales, mandated by that central bank.

That was not and it seems still is not what the ECB is mandating.

There certainly can be a case made for restricting capital inflows in an economy when the main purpose is speculation e.g. the carry trade.

That option of course isn’t available within the currency union.

On FDI, Philip says:

“In terms of the real economy, an important driver of recovery has been Ireland’s success in attracting new FDI projects…a significant surge in FDI activity since 2012.”

There were a net 8,000 direct jobs in FDI added in 2008-2013.

The total numbers at 175,000 in 2013 (2012 Forfas numbers plus agency reported numbers for 2013) compared with 184,000 in 2000

IDA Ireland don’t give a value breakdown of investment value by new/existing or total but it’s likely that the big existing base of FDI provided two-thirds of investment by value.

The American Chamber of Commerce said in a report last year that “over the five-year period starting in 2008 and ending in 2012, US firms invested more capital in Ireland ($129.5bn) than in the previous 58 years combined…the level of investment in Ireland over 2008-2012 was roughly 14 times larger than US investment in China.”

CSO and UNCTAD data shows lower amounts – the chamber includes changes in retained earnings that may reflect tax-related ‘trapped cash.’

1. looking at the quarterly NIIP imbalance (, the deterioration started 2007Q4 (-19%) and was practically fully through 2009Q3 (-98%) with most of damage done already until 2009Q1 (-89%)

2. I see also high POSTIVE values for the years < 2000 !!! ????

3. If I use the “external debt” from the CIA world factbook instead of the IFI, I get a factor of 10x GDP

4. Looking at the S&P Case Shiller index ( additional info sub menue for excel download) , I see US house prices dropping from 220 in 2007Q2 to 150 in 2009Q1, or 1/3

To explain the Irish NIIP change purely in US House prices changes in an extremely brutal way:

( 98% – 19% ) / 10 = x / 3 gives a US house fraction of external assets of 23.7%, not unreasonable, and significant digits just given to facilitate others to follow the calculation, but not meant to be significant!

Doing some fitting:

Ireland NIIP to the US Case Shiller House Price Index, with a time lag of 3- 6 month, gives a correlation coefficient of 0.89 with just 2 parameters( or 3 , if you count the weak dependence on the time lag for mark to market of CS price data), very, very remarkable for economic data!

But I would LOVE to hear from others, on different and especially contradicting points of view!!

Adding some other parameter like some continous inflow of < 2% GDP gives a correlation of 0.96,

Adding some interest payment jerks up the correlation to 0.98 with unreasonable values for the interest.


Irish NIIP is about 90% determined by the valuation of US House prices, and how the US FED steers them via QE massaging of US mortgage rates

And there is some additional lagrangian constraint in the data, I smell it with all my physicists fibers. Something really worth to know for me


1. How is the HRE accounted in these numbers? That was a 200b hit Germany had to take somehow in 2008, somehow due to Irish accounting / supervision, (accounting for some 100% Irish GDP, just to put things into perspective)and some 50b “found” again somehow in 2012

2. Is there a way to make a simple excel sheet available to the interested readership here, to play around with it, while staying anonymous, maybe sending it to Michael Hennigan, and he makes it available on his web site, or, …. Any other suggestions?

3. what time delay in mark to market was law/rule, when, in the US and Ireland?

I see Angela opened her arms wide to the Ukraine, 80% of Ukraine products including agricultural exports can now enter the EU duty free. Reciprocity was not demanded which means this is actually beneficial to the Ukraine.
Imminent defeat improves reasoning powers immensely even for physicists.

@ Peter Lane

I played a little more with fitting the Irish NIIP
Adding interest rates, the Current Account, 10 metro vs 20 metro Case Shiller Index, it doesn’t add any value or significant correlation improvement


Irish NIIP = 158 – 1.00 * SPCS20R + 2.6 time

Time in years
SPCS20R the 20 metro index, with a 3 – 6 month time lag
And NIIP , 158, 2.6 as GDP percentages

Gives a correlation of 0.97, with remarkable reproduction of details, despite the hilarious simplicity

@Mickey Hickey

“Imminent defeat improves reasoning powers immensely even for physicists.”

Germany is taking a surprisingly tough stance on Ukraine, but the ‘Ukraine’ is already in breakup mode, into the historic Russian, Polish camps.

Some of the Polish people I work with are very angry and alarmed at the Russian stance. Comparisons with Stalin and WW3 being mentioned. The extent of their alarm surprised me.

@Joseph Ryan
The Western Ukraine largely Catholic and ruled by Poland and the Polish/Lithuanian Empire as well as the Austrian Empire at various times has a troubled history (worse than Ireland). One of the two most intelligent people on here refers to the Kievan Rus where the first Eastern Slavic state was formed in the 9th Century, the start of the Russian Motherland. The Kievan Rus entered a bad period from 12th to 14th century, by mid 14th they were under the Golden Horde/Lithuania/Poland. In the 16th century this became Kingdom of Poland/Poland Lithuania Commonwealth/Crimean Khanate.

In 1653 there was a rebellion against Polish Catholicism and in 1654 they asked Moscow to join them to Russia dominated Ukraine (Russian/Eastern Orthodox) east of the Dnieper river. Moscow cooperated.

Poland hit a rough patch from 1772 to 1795 during which other parts of Ukrainian speaking Poland were ceded to Russia with a smaller part going to the Austrian Empire. The Russian revolution of 1917 led to chaotic conditions where Poland ruled part of Ukraine until 1922, In the 1917-1922 period Russian had a civil war and the Ukraine independently had its own civil war (Communism). In `1922 Ukriane became one of the founding members of the USSR. In 1932-33 they had their version of Ireland’s 1845-1847, imposed by Stalin to discourage grain hoarding. The Western Ukraine was known as the granary of Europe and this is where animosity to Russia is deeply embedded.

Ukrainians pulled more than their weight in the USSR in high tech industries, particularly in the industrialised (Russian) east. Today the Western Ukraine still lags the East.
I met a Ukrainian lady from Buffalo NY who knew the Irish culture scene in the USA, in her estimation the Irish and the Ukrainians were the two that held on to their respective cultures the longest.

Much like Ireland a country crippled by differences imposed on them by foreigners. Or one could say they succumbed, as we did, to the narcissism of the gross exaggeration of minor differences.
I agree with you the most likely outcome is partition. The EU made the mistake of misreading the situation and treating the Ukrainians like PIIGs. The Crimea is a cakewalk compared to where the final border will be drawn. A line from Kharkiv Oblast to Odessa Oblast seems likely. A safe corridor for oil and gas pipelines to the EU must be at the top of the list for Russia. In a rational world, remembering the 2009 blockade of gas to the EU it would be a factor for the EU to consider. As we Irish know only too well the major world powers will make the choice that serves them best.


Thank you for that very interesting summary, a lot of it new to me.

“The EU made the mistake of misreading the situation and treating the Ukrainians like PIIGs. ”
One wonders who drives this stupidity within the EU. Economics is not one of their better subjects; neither is history, apparently.

“The Crimea is a cakewalk compared to where the final border will be drawn.”
Spot on.

@ Joseph Ryan,

I wonder, what you would have done differently with respect to the Ukraine, and whose fault in the EU it should be.

Ukraine runs a deficit, also because they have huge energy subsidies, so far partially financed by Russia via cheaper Gas prices, and apparently they could not agree with the IMF to reduce those subsidies.

When their living standard will sink now, at first, they will need somebody to blame, and you can be sure, that the EU in general and Germany specifically will be blamed, for not forking over enough money fast enough.

As some background information I learned the following

A pretty good speech of Gysi, the elder guy of the German Left

The vote for the removal of Yanukovich apparently did not reach the constitutionally required 3/4 majority, and it was of course not followed by the other provisions

I found also an english read on it:

wiki/Verkhovna_Rada, wiki/President_of_Ukraine as additional information.

That makes it an unconstitutional armed Coup.

What Gysi also reports is , that the leader of the government pary Svoboda calls for “grab your guns, fight the russia pigs, fight the german and the jewish pigs”

I do not want the Ukraine to have visa free access to the EU

“I wonder, what you would have done differently with respect to the Ukraine, and whose fault in the EU it should be.”

The Ukraine, as outlined in the short brief above by Mickey Hickey, is a supposed polity divided by culture, religion and history. Over the past 20 years it has been run for the benefit of plutocrats and kleptocrats, creating a further wealth/poverty divide to add to the mix.

Yet, The EU may a ‘play’ to bring the Ukraine into its economic orbit, and away from that of Russia. The benefit to the EU presumably being a potentially large export market for industrial goods.

Even though the attempt was crass, the EU delegations arrived in the Ukraine armed with the usual modus operandi, its Troika formula, and of course empty pockets. The Ukraine’s rulers, having robbed the country to the point of bankruptcy over the past 20 years, wanted just one thing, a large cheque, so that they could continue in power to further enrich themselves.

The EU wanted access to Ukraine markets, but was unwilling to pay the price.

The new Ukraine ‘rulers’, immediately put a number of billionaires in charge of the regions, (so that they could get their money out more expeditiously), and banned the Russian language.

Such a new polity, deserves nothing but contempt, but is being hailed in the Western media, as if they were utopian democrats.

The best solution, imho, would have been a Vaclav Havel velvet type negotiation to federalise the Ukraine into its cultural components, with a constitutional bill of rights, independently monitored, being the first item on the agenda.

The continued tug of war between Russia and the West, for a country riven with division, as the Ukraine is, is a recipe for disaster.

For some reason, the US (or Kerry at least), does not want to let go of something that he does not even hold, nor something that is his to hold.
The same applies to any Russian ‘claim’ to western Ukraine.

As you should also know, there are many recent historical memories for Russia in Ukraine, not least the fact that an entire Russian army of approx 700,000 that was surrounded and wiped out at Kiev in 1941. Neither that, nor the historical Kievan Rus, will be forgotten in Russia.

The West, should start to talk to Russia, and this time they should start to put peoples lives first, not export markets to countries run by plutocrats and kleptocrats, whether in Ukraine or Russia itself.

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