How Ireland Got Its Groove Back

Austerity’s New Poster Child Tricks the Markets

Graffiti in Dublin. (Cathal McNaughton / Courtesy Reuters) 

The Irish have an expression, "to put on the poor mouth" -- meaning to exaggerate the severity of your circumstances in order to gain sympathy, charity, and perhaps forbearance. In the aftermath of the collapse of Ireland's construction bubble in 2007, the country did exactly that and received a package of loans from the European Union and the International Monetary Fund (IMF) that will last until 2014. For years, Dublin has sought to ingratiate itself to the European authorities, arguing privately that it would default on its loans absent a deal on the 64 billion euros of banking debt that past governments had run up.

At long last, Ireland is beginning to move beyond putting on the poor mouth. The country's prime minister, Enda Kenny, recently graced the cover of Time, accompanied by the headline "The Celtic Comeback," and the Financial Times called Ireland's finance minister one of the best in Europe. The nation's largest banks can borrow again on the open market. The interest rates on Ireland's sovereign bonds -- seen as key indicators of the probability of default -- are rapidly falling. Rating agencies such as Moody's and Fitch have upgraded their outlooks on the country and some of its banks.

The turnaround seemed nearly complete last summer, when the government held two successful sovereign bond auctions and planned many more for the next year. By late 2013 or early 2014, Ireland should no longer need the assistance it has received from the EU and the IMF. The economy is still growing slowly in terms of GDP, but it is far from collapsing. Exports have driven most of this growth, thanks to unit labor costs that have fallen faster than those of any other country in Europe. Irish banks are deleveraging -- dumping bad loans, basically -- in order to shrink their balance sheets down to a more manageable size. Ireland is still a haven for multinational corporations searching for low taxes and a flexible, young, skilled

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