Denis O’Brien, the telecoms billionaire, was one of a handful of Irish people at Davos, where he attracted plenty of media attention. That’s hardly a surprise. He is Ireland’s most successful businessman for a reason — he rarely makes a wrong call about market developments.
Last week, when he mentioned the word bubble in an Irish context, it was bound to have made a few people nervous. After all, investors are still nursing losses following the last bout of irrational exuberance that reached a bloody denouement in 2008. In the Noughties when questions were raised about the sustainability of the property boom, the familiar refrain from the regulatory agencies and the banks was: “This time it’s different.”
There is no doubt that the number of cranes on the Dublin skyline is redolent of the heady days of the Celtic Tiger. The rationale for elevated levels of commercial property activity is that Britain’s decision to leave the European Union would create a Brexit dividend for Ireland in the form of increased investment from financial services firms looking to retain a foothold in the single market.
Initial estimates suggest that up to 15,000 finance jobs could be transferred from London to Dublin. This has since been revised down to less than 2,000, although the final scale of investment will not be known until a new trade deal between the UK and the EU is agreed. Without the Brexit dividend, it would seem that there are unsustainable levels of office building in the capital. However, market sources claim “that this time it is different”.
Before investors scramble for the exit door, there is nothing irrational about their exuberance. Between 2008 and 2014, there was very little office building in Dublin. But the recovery took hold from 2013 onwards. In other words, there is a lot of pent-up demand for office space and that is often just domestic companies looking to expand. Robust levels of foreign direct investment have been heaping pressure on existing demand.
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But the crucial different between now and the Noughties is how these projects are being financed and on what terms. In the years leading up to 2007, the boom in commercial property was fuelled by very high levels of leverage. Banks were in the business of lending and investment firms were busy putting together highly geared property funds. Very often construction activity was based on speculative developments.
Fast forward ten years and there has been a change in those factors. Most of the development, certainly in the docklands area, is pre-let so there is very little speculative construction activity. Also, a lot of the funding for these developments is based on equity financing, so even if there is a bubble, there won’t be contagion to the wider economy in the event it bursts.
One government source seemed sanguine about the prospects. “If there is an oversupply, then that might not be a bad thing. It would force existing rates to come down, which would improve competitiveness.” As always, only time will tell whether this confidence is misplaced.
Euro’s final pillar
When the physical euro was launched on January 1, 2002, it was the first tangible sign that monetary union was going to change the way people lived. The assumption was that the policy-makers in Brussels had done their homework and the foundation stones were solid. This was certainly the case for the first number of years of the new currency’s life.
But then again, the euro was cushioned from reality over these years by a credit-fuelled bubble which was wending its way through the developed world. When that bubble burst, economic realities came crashing down. Privately, officials in Brussels conceded that the architecture of the single currency was incomplete when it was launched. The view was that the economies of the member states would converge over time, which would encourage them to implement the reforms needed to make the single currency bombproof and sustainable.
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The glut of cheap money circulating through the arteries of the eurozone’s financial system caused reckless levels of private-sector lending and borrowing and in some cases reckless levels of sovereign borrowing. When the global financial system hit the buffers in 2008, a number of periphery eurozone countries were left badly exposed. There was a question mark hanging over the euro’s existence until Mario Draghi, the president of the European Central Bank, made his “whatever it takes” speech in August 2012.
But there is only so much the ECB can do and that reached its limit following the aggressive quantitative easing programme announced in March 2015.
There are competing visions of what is needed to ensure the euro has a healthy and prosperous future. President Macron of France favours much closer fiscal integration, which includes a eurozone finance minister and tax harmonisation as well as a common budget. Regardless of the economic merits of this approach, it is unlikely to find political support.
The Irish government wants a completion of banking union and the establishment of a capital markets union. It is certainly more politically palatable, but it is missing one key input to make it work. Step forward Philip Lane, governor of the Irish Central Bank. Yesterday he unveiled proposals for a sovereign bond-backed security, to act as a benchmark eurozone safe asset.
The European Commission would need to change regulations for it to work and there are still some issues that need to be addressed, but it could be the final pillar that supports the future of the single currency.