WSJ Article: 'Celtic Tiger' Ends Prosperous Era

‘Celtic Tiger’ Ends
Prosperous Era
With a Whimper
Credit Crunch and Local Housing Slump
Push Dublin Market Down 26.1% for the Year
December 31, 2007; Page C2

DUBLIN – Ireland’s decade-long Celtic Tiger economy not only ran out of steam in 2007, it bled copiously, judging by the woeful performance of its stock market.

After faring better than most major global indexes over several years, the benchmark ISEQ index was one of the worst-performing markets in the world this year, tumbling 26.1%.

“The party’s over” has become the favorite phrase among commentators after 10 years of rapid economic growth, a buoyant stock market, record house prices, near-full employment and ballooning consumer borrowing.

But while economists don’t see an end to the souring of sentiment toward the Irish stock market, they say the past year’s terrible performance is a massive overreaction, given Ireland’s still-healthy economic outlook.

The reason? Ireland has been caught in a double whammy of the international liquidity crunch, started this summer in the U.S. subprime-mortgage market, and its own housing slump, said Robbie Kelleher, head of research at Davy Stockbrokers. As a result, the price/earnings ratios of some Irish companies have fallen to levels not seen in as many as 20 years.

Blue-chip financials make up 40% of the ISEQ, while the construction sector accounts for around 20%. Both have taken a battering. Some fear that the steep declines could continue well into 2008, particularly if housing prices fall 10%, as some have predicted.

Economists have likened Ireland to Spain, which also began to suffer a construction meltdown in 2007. As in Spain, the Irish construction woes have been enough of a catalyst for international investors to unload their stocks.

A slowdown in building also is a big reason that the Irish economy is expected to slow in 2008. The Economic & Social Research Institute, based in Dublin, expects that gross national product, which excludes earnings from multinational companies that are based in Ireland and were a key driver of the 1990s boom, will grow by 2.8%, the slowest rate of expansion in 16 years.

The think tank also said house prices are overvalued by about 15%. They fell an average of 6% in 2007 after rising 12% in 2006.

In another sign that the Celtic Tiger is fading, Finance Minister Brian Cowen in December unveiled a conservative 2008 budget that foresees real gross domestic product growth of only 3%, down from 4.75% in 2007 and earlier government estimates for 2008 of 3.25%. The budget also foresees a rise in unemployment to 5.5% in 2008, from around 4.5%.

Already, some banks have issued profit warnings. Bank of Ireland PLC in November cut its growth projection for underlying earnings per share for the fiscal year ending March 31 to a high-single-digit rate from previous guidance of low-double-digit growth, citing tightening global credit markets. The announcement cast a pall on all financial stocks. Bank of Ireland shares plummeted 42% in 2007.

In addition, Irish Life & Permanent PLC warned that 2008 operating earnings could be flat, slightly ahead, or even down by a “high-single-digit” percentage, depending on funding costs. Its stock plunged 43% in 2007.

The declines came despite some strong performances in 2007. Anglo Irish Bank Corp., for instance, reported a 52% rise in fiscal full-year net profit to €998 million, or about $1.5 billion, while Bank of Ireland in November posted a 27% rise in first-half net profit to €926 million. Anglo Irish shares are down 32%. Both banks have said that they have minimal exposure to subprime borrowers in Ireland and the U.S.

Among construction stocks, building-materials maker CRH PLC, which makes up approximately 13% of the ISEQ index, has lost 25% of its value this year, even though only around 6% of its profits originate in Ireland.

Other large stocks have been hit by other afflictions.

Drinks group C&C Group PLC, one of the hottest stocks of 2006, blamed the summer’s 50 consecutive days of rain for washing out sales of alcoholic cider. C&C shares plunged 69% in 2007.

While slower economic growth is preferable to recession, the forecast has done little to cheer the Irish markets, leaving traders feeling powerless and fearing that this small, export-dependent economy could really start to suffer in the new year, especially if the global credit crisis pushes the U.S. toward a recession.

“We’re in a tailspin,” said one trader. “Investors just see slowing growth, which creates a vacuum. All we can do is batten down the hatches and wait until the earnings season in the spring.”

Write to Quentin Fottrell at quentin.fottrell@dowjones.com1

Final numbers for the ISEQ

Compare the performance of the ISEQ to that of the FTSE 100 or DJI … E&c=%5EDJI

ISEQ down 27% while both the FTSE100 and Dow Jones have made modest gains on the year.

Blue Horseshoe

ISEQ, meh.