Free Financial Institutions of the Republic of Ireland Essay Sample
Republic of Ireland state is an Island situated in North West of Europe, it’s the largest Island in Great Britain and third largest in Europe. Ireland is highly inhabited by people with a Celtic origin and only minorities of inhabitants have Anglo-Normans Origin. The Island had a population of approximately 6.27 million people as of the year 2010; approximately 4.47 in the Ireland republic and around 1.8 million in Northern Ireland (Paul, 1998). English and Irish are the main official language spoken in Greece. The largest religious group in Ireland is Christianity with the Roman Catholicism as the largest Christian denomination approximately 73% of the Irish population. The rest of the population is mainly protestant (John, 1984).
In 1800, Irish parliament and Great Britain passed an Act of Union which made Ireland a part of the UK officially; however this was up to 1921. Ireland fought for its freedom from the Great Britain in 1921 and following an Anglo-Irish Treaty in 1922, Ireland become a free independent State within the Common wealth; however, Northern Ireland choose to remain as part of the great Britain (De Boer-Ash, 2004).
Ireland is one of the countries that exhibit vibrant open economies among competitive nations in the world market. The mid to late1990s which also referred to as the ‘’Celtic Tiger’’ period marked a remarkable two digit GDP growth in the Ireland. This GDP growth was boosted by the industrial policy that worked to improve exports and the foreign direct interest investment to a large scale. Irish GDP growth was the best among the 15 original members of the EU between 2004 and 2007 when it averaged to about 5% (Diarmaid, 2004). This was thus among the best periods in the Irish economy with the creation of over 90,000 new jobs yearly and over 20,000 foreign workers. It is notable that about a quarter of the newly created employment opportunities revolve around the construction industry.
Despite the stable and promising GDP growth rate of Ireland’s economy, it experienced some slowdown in 2008. The collapse of the property market in Ireland brought a lot of pressure on the Irish banks and thus maintains their loan books, particularly in real estate. The government’s finances collapsed in response to an addition of revenue as a result of taxation on property transactions. It was rather unfortunate that the Irish economy in 2010 underwent deflation, unavailability of credit, an expanded budget deficit of the government and increased level f unemployment. This awful economic condition was further experienced due to the lost confidence in consumers and their reduced spending. Ireland’s GDP has had a negative growth with the exports growing slowly. The government was very concerned and worked towards cutting the daily spending as well as capital (Diarmaid, 2004).
There was thus an increased pressure on the banking sector of Irish a result of the end of an end to its property boom and the apparent collapse of the construction industry. The government `took a quick action on 2008, when they introduced temporary guarantees to personal depositors to maintain the deposits level so as to ensure the survival of some financial institutions. The nationalization of the Anglo Irish bank was all in an attempt to save the day and it also followed that the government took majority of stakes in several other banks. The creation of the National Asset Management Agency (NAMA) by the Irish government was successful in that the Irish banks transferred a big part of their property-related loan books.
The increased exposure to debt left the Irish government with no other option rather than seek for the International Monetary Fund (IMF) and the intervention of the EU in November 2010. The EU-IMF gave Ireland a 3-year, 85 billion euro bailout package to cover future the shortfalls of government funding with the inclusion of the falling banks recapitalization on a short-term basis.
These funds got approved by the European Union finance minister on November 28 in Brussels. The funds carry an interest of 5.8% on average. There is 67.5 billion euro i.e. $89.7 billion in the peripheral aid, which emanates from the IMF, the Stabilization fund of the EU, the UK joint credit, Sweden and Denmark. 17.5 billion euro which is equivalent to $23.2 billion will be added from Ireland’s National Pension Reserve Fund and the ready money from its treasury. It will be mandatory for Ireland to glue itself to a strict economic plan in return to the bail out. The plan will be designed to reduce the GDP deficit of 3% within 4 years. This will firstly entail cutting approximately $20 billion from the countries budget over the span of 4 years (Segoviano, 2005). The state of Ireland has also taken control of the EBS and the Irish National Building Society. The Irish government has aided to re-capitalize and to increase further its shareholding in the Bank of Ireland in 2011 (Paul, 1998).
Ireland is an independent, sovereign, democratic nation that operates under parliamentary system of government. The president is democratically elected for a 7-year term and serves as a ceremonial head of state with a single opportunity of being re-elected. In November, 2011 Mary McAleese was succeeded by Michael Higgins. The ruling president is assisted to carry out constitutional powers by an advisory body of the Council of State. The president can dissolve the parliament (Oireachtas) on the prime minister’s (taoiseach's) advice (Rajan, 2001). The parliament’s lower house is responsible for electing the prime minister as the head of the political coalition parties or party that gets the majority of the seats in the national elections which are held after every five years unless in a case when it can be called earlier than the 5 years. The cabinet is thus given all the executive authority. This cabinet is apparently comprised of ministers who are nominated by the Taoiseach and approved by the (Dail, 2009).
Every environment that embraces change facilitates the operation of political life and political systems. Instability in public institution would thus be experienced through changes that are brought about by various factors such as civil disobedience, war or an election defeat. It is thus appropriate to appreciate the stable political history that has been experienced in Ireland since independence. Ireland is therefore, among the few which retained its constitutional government unchanged despite the setbacks brought about by the two world wars. However Northern Ireland has had several instances where it has experienced polarization, instability, as well as ethnic conflicts for the better part of its existence. The main reason for these experiences is the fact that most of Irish political behavior and aspects have supported democratic politics without any undermining since 1920s. Ireland’s political culture that existed around that period is the main reason of the fact that democracy still exists while the balance of influence practiced by other nations contributed greatly to the non existence of democracy.
The politics of Ireland is dominated by two major political parties which came up following the 1922-1923 Ireland’s civil war. Individuals opposing the 1921 treaty that led to the partitioning of the island formed the Fianna Fail. Despite losing the protest, Fianna Fail rose to become the largest political party and has dominated the government since 1930s. The second party that won in the treaty that led to the separation of the island is Fine Gael that holds the government occasionally followed by other significant parties such as Sinn Fein, Labor and the Greens.
A clear proof that Fianna Fail still dominates the political world of Ireland is given by the May 2007 national election win by Bertie Ahern for the third 5-year term in power in a coalition government that was composed of Fianna Fail, Green Party and Progressive Democrats. The elected leader, Bertie Ahern appointed Brian Cowen the Finance Minister as the Deputy Prime Minister in his government.
The Ireland general election held in February 2011 marked the big change in its political history following the win by Fine Gael and Labor political parties which agreed into forming a coalition government. Finna Fail suffered the worst defeat in its history since its inception. The leader of Fine Gael, Enda Kenny apparently became Taoiseach, while Eamon Gilmore the Labor leader became Tanaiste as well as the Foreign Minister.
Financial Markets in Ireland
To encourage potential inward investment in Ireland republic, the Irish government has established policy aimed towards promoting establishment and enlargement of financial institution and markets in the country. There are over 450 financial institutions i.e banks insurance companies and other credit facilities operating in Dublin, the capital of the republic of Ireland. In year 2002, insurance sector and other financial sectors in the economy contributed to approximately 21.2% of the country’s export. Insurance has been one of the key financial institutions in Ireland with the country hosting over 10 of the world’s top 20 insurance companies. The Central Bank of Ireland is the main financial institution that regulates other financial institutions and financial services. The bank initially issued Irish bank notes and coins, till the Euro currency was introduced and the bank now issues this currency to the Central Bank of Europe.
Irish Stock market exchange operates in three markets. Firstly, there is the Main Security Exchange market (MSM) which forms the main market for Irish and other overseas companies. The market is regulated by the government and operates in a wide range of securities including bonds and other trading funds. It’s the primary market for the Irish Stock Exchange and involves the major companies both in Ireland and other international companies. The second market is the Enterprise Security Exchange Market (ESM) which is designed to promote growth of companies. According to MiFID, Markets in Financial Instruments Directive this market is a regulated exchange market. This ISE market is designed to ensure small companies grow by meeting all the financial needs of small companies at their earlier stage. The third market is the (GEM) Global Securities Exchange market which is a special debt market designed purposely for the professional investors. The exchange market is owned by the Irish Stock brokers (Cormac, 1997).
Irish has developed several covered bonds market. This market has grown into an active market (Irish markets). According to Irish common legal frame works these bonds can only be issued by the financial credit institutions which have been designated by the Irish market regulator, otherwise known as Irish Financial Service Regulatory Authority (IFSR). These covered bonds are financially secured by a collection or pool of assets. Before public credit and mortgage secured bonds are issued. Covering assets is divided into two separate pools, public and mortgage in separate registers. In the mortgage pool, the maximum loan vs. value ration allowed is 75%, that’s to cover for residential properties and 60% to cover for commercial properties.
In 2010, Irish interest rates rose to their highest lever immediately after the launch of single currency in Europe. This happened in the midst of developing evidence that repeated bouts in budget austerity have been deemed to fail to convince potential international investors that Irish Celtic Tiger economy can cope or survive the banking crisis as a result of bust or boom in the housing market.
The Irish labour market is highly flexible and this aids in accelerating adjustments in wages and to maintain an external competitiveness within the currency union. The flexibility of Ireland labour market is highly comparable with major economies like the United Kingdom and the United States. The flexible labour market has facilitated reallocation of labour to the most productive sectors of the Irish economy thus enhancing economic growth.
Regulation of financial markets is a form of monitoring institutions of finance so that they meet certain requirements and codes of conduct so as to maintain integrity of these financial markets. Most countries in the United Kingdom have undertaken remarkable changes in the process of regulating the financial market. Ireland has not been left behind in this measure. These markets (financial markets) are highly monitored in Ireland.
The central bank of Ireland has the sole responsibility of regulating the financial markets. It supervises regulated markets and all market operators that are authorized in Ireland. Regulated markets are markets with a permit which fulfill regulations of Markets in Financial Instruments Directive (MiFID). The central bank of Ireland supervises banks and companies in insurance industry, security firms and regulates their code of conduct. It also has a mandate of authorizing market participants. In addition to these duties, the central bank of Ireland also regulates investment exchanges and also collective schemes of investment (Tobias, 2008).
The system moved from self regulatory to a mixture of government intervention and a self regulating system. This process of financial market regulation tries to promote and provide fair and efficient securities and financial markets in Ireland. Market Abuse Directive of the European Union that was recently implemented in Ireland provides for important obligations to every listed issuer of securities or financial instruments and who is listed on the stock market. The securities mentioned include government bonds, specialist securities, equities, investment funds, corporate bonds and exchange traded funds. These provisions reinforce the already presented stock exchange rules on inside information and generate a new offence on market manipulation. Financial regulations generate a most effective way of prevention of forex fraud and minimizing its occurrence. This ensures a fair treatment of the consumer. Member nations of the European Community (including Ireland) have created a regulatory body to supervise the forex market. This body in collaboration with other institutions integrates the union’s financial markets and thereby increases all major investments.
Ireland’s GDP has expanded gradually by 1.6% in the second quarter of the year 2011. Previously, Ireland recorded an average of 0.67% and reached a high of 5.4% in March 2007. It also had a low of -3.7% in December 2008. The GDP between 1995 and 2007 averaged to 6%. Ireland however underwent a recession in 2008 due to a decline in economic activities and a slowdown in property and construction markets. The only component of the Irish economy remaining is the export industry. At the start of 1990, unexpected economic growth and development escalated the level of the Irish GDP to almost double its previous size. The success is mainly due to its EU membership and adoption of the open economy system. It also had access to the Single Market, increased female participation in the labor market, sustained investment system of education and training. The strong economy of Ireland in 2006 contributed to healthy public finances. A surplus of 3% of the GDP was apparently recorded. Despite the progressive trend, the present downturn has moved the public finances to a heavy deficit. Output for the first time (since 1983) fell in 2008 forcing a deep recession in 2009 (Rajan, 2001).
Between 1981 and 1990, Ireland’s economy and population grew rapidly. This was instigated by the move towards an open economy. As a result, there was an increase in employment and also wages which largely benefited the Irish people. However, in mid 2000, Ireland like other nations in the world faced an erosion of its international competitiveness. It began to experience a tremendous real estate and property fizz. The fizz finally exploded ion 2008 thereby exposing prominent Irish banks that had accumulated so much debts and losses. Later in 2009, the government nationalized banks and developed a National Asset Management Agency which had a mandate of buying the banks bad loans. The program was costly and expensive and drove the budget into a deep deficit ( Cooper, 2009).
Consequentially, tax increases and cuts on social welfare for the public sector ensued. Similar to the U.S.A, banking losses in Ireland were miscalculated forcing the state to borrow funds from the European Central Bank (ECB). An €85 billion grant was issued to Ireland between the International Monetary Fund (IMF) and the ECB in 2010. Many financial analysts have compared Ireland to Greece.
However, unlike Greece, Ireland has a good position to recover and build. It maintains a good political and taxing system and also enjoys rise in its exports. Despite the positive incentives to recover, Ireland seems to have adopted rather unfavorable measures. Debt problems are being solved by inoculating precedent creditors as they pile on more debts at an interest rate of 5.8 percent. This has not helped Ireland’s return to the financial market to borrow funds at a rate that is affordable. A solvency problem occurs due to a rapidly rising scale of debts in Ireland. However, it is being treated as a liquidity problem like in Greece and other parts of the world facing financial crisis (Tobias, 2008).. With all protocol and prudence observed, Ireland’s debt versus Gross Domestic Product ratio is predicted to reach 115 percent and even 140 percent by 2014.
Ireland should run their financial markets in a fair manner that will attract potential foreign investors into their markets. This should be highly encouraged in the Irish security markets which will in turn increase the value of the securities in the market attracting more investors into the market. The government also needs to discourage foreign borrowing and bonds and turn to more domestic borrowings to avoid foreign huge debts. The financial budget deficits experienced in Ireland should be controlled using fiscal policy and monetary policy to ease inflation pressure and rise in prices. This can be achieved if Irish government squeezes its domestic consumptions and increase its spending and balance the budget, which will in turn foster growth and enlargement of financial markets leading to growth and development of the Irish economy. Doing this will deal with the deficits but not the countries debt which has been adversely affecting the Ireland economy like in the year 2010 this debt consumer approximately 11% of Irish tax revenue. The country can also seek to balance its deficit by developing high European continent tax rates however, this method will not be enough to deal with the countries debt, other measures needs to be taken to ensure the countries’ financial markets are able to thrive well and develop enough revenue to run the Irish economy and pay its international debts.