Fund Domiciles

Economy

The Irish economy is suffering from a severe economic downturn. The Irish government officially announced it was in recession in September 2008, with a sharp rise in unemployment occurring in the following months. The Republic of Ireland was the first state in the euro-zone to enter recession as declared by the Central Statistics Office. The number of people claiming unemployment benefit in Ireland rose to 326,000 in January 2009, the highest monthly level since records began in 1967. According to Ireland’s Central Statistics Office, the nation’s GDP shrank by 7.5% in fourth quarter of 2008.

In particular the Irish economy is suffering from an exceptionally difficult banking crisis. A number of Irish financial institutions have been forced to obtain government assistance. Irish banks had bet heavily on securitised assets, as the financial sector assumed a leading role in the Irish economy.

The December 2008 a hidden loans controversy within Anglo Irish Bank led to the resignations of three executives, including chief executive Sean FitzPatrick, and the institution was nationalised in January 2009 when the Irish government determined that recapitalisation would not be enough to save the bank. Recapitalisation was however carried out at the country's two largest banks, Allied Irish Bank (AIB) and Bank of Ireland (BoI), with bailouts of €3.5 billion confirmed for each bank on 11 February 2009. Since then it has emerged that Anglo Irish Bank falsified its accounts before it was nationalised, with transactions between it and another financial institution, Irish Life and Permanent, being uncovered.

In the 15 years to 2007 Ireland’s GDP growth per capita was the fastest growing in the OECD. Its booming financial sector, and in particular the growth in asset management related activity, was an important reason for this. However, Ireland’s economy declined in 2008 with the Economist Intelligence Unit (10 June 2009) forecasting a contraction in GDP by 2.3% in 2008 with a further decline of 7.5% in 2009 (and down again in 2010 by 2.8%). The unemployment rate, which was 4.6% in 2007, is predicted to rise to 13% by the end of 2009. Inflation is forecast to fall from 3.1 per cent in 2008 to 0.7 per cent in 2009. According to the Irish government the budget surplus of 3% of GDP in 2006 has eroded into an estimated deficit of 6.4% in 2008 and a predicted 12.6% in 2009.

In December 2008 the Government announced a recapitalisation plan to “supplement and encourage” private recapitalising investment. The two main Irish banks – Allied Irish Bank and Bank of Ireland – will be the recipients of the recapitalisation plan. In April 2009 the government delivered a supplementary budget to address the widening deficit in public finances. Tax increases and spending cuts worth €3.25 billion in the 2009 (as well as further cuts in 2010) were announced, as well as the creation of a National Asset Management Agency (NAMA) which will buy loans and assets from the main Irish banks, reducing uncertainty over bad debts. The National Asset Management Agency covers the six financial institutions which are covered by the Irish government's deposit guarantee scheme. Those institutions are Bank of Ireland, AIB, Anglo Irish Bank, EBS, IL&P, Irish Nationwide. The Minister for Finance, Brian Lenihan, said the banks would have to assume significant losses when the loans, largely made to property developers, are removed from their books.

On 8 June 2009, Standard and Poors lowered its long-term sovereign credit rating on Irish debt from AA+ to AA. The agency stated that the long term costs to the Irish government of supporting the Irish banking system would be significantly higher than it has originally forecast. Meanwhile Moody’s has downgraded all 12 Irish banks.

Governmental and political system

Ireland is a republic, with a system of parliamentary democracy. The next Parliamentary elections are due in 2012 and the next Presidential election in 2011.

On 7 May 2008, the leader of Fianna Fail Party, Mr Brian Cowen, became Prime Minister of Ireland, following the resignation of Mr Bertie Ahern. Mr Cowen had previously served as Minister for Finance and Deputy Prime Minister under the Ahern administration. On 22 April 2009 Mr Cowen announced some changes to the government, including the reduction of Junior Ministerial positions from twenty to fifteen.

A major political scandal could well emerge from the falsification of Anglo Irish Bank’s accounts. It is now known that a supposed "Golden Circle" of 10 businessmen are being investigated over shares they purchased in Anglo Irish Bank in 2008.

Active participation in European Union is a priority for the Irish government. Despite the strong support of the Irish government, the Irish voted “no” to the Lisbon (EU reform) Treaty in a referendum on 12 June 2008. Prime Minister Cowen announced in Parliament on 8 July 2009 that the second referendum on the Lisbon Treaty would be held on 2 October 2009. This time, Irish voters supported the “yes” vote by a margin of two to one, with 67.1 per cent of the electorate voting in favour of ratifying the Lisbon Treaty, and 32.9 per cent against.

Population (approx)

4.2 million

Stability

Ireland faces a significant threat to its economic stability.

There is concern that if the global economy does not further improve then Ireland might have difficulty servicing its debt which could lead to national insolvency. With the recent decline in its credit rating Irish national debt might become too difficult to service.

Should this happen, which would likely lead to the government demanding further substantial tax increases, then an exodus of key staff from the IFSC could become a problem Dublin’s fund industry service providers.

This is the first economic downturn in Ireland since the early 1980s and appears to be the most severe since the Second World War. Ireland is facing the threat of depression as opposed to recession (as in many other countries). For a country that had become used to be known as the “Celtic Tiger” the current crisis is a severe shock.

Membership of the euro-zone is also a concern for the country’s fund industry service providers. Their costs are in euros whilst most of their clients work in dollars or pounds. The euro has appreciated very considerably against these two Anglo-Saxon currencies. Irish fund industry service providers either have to quote in dollars, which means that their own cost base is severely squeezed (particularly salaries) or they stick to euros and risk pricing themselves out of the market.

Threats to this domicile

Whilst the Irish fund industry should benefit from AIFM, and the anticipated further redomiciliation of funds into the EU, it nonetheless faces an immediate and serious economic crisis. The crisis could impact the Ireland’s well developed and substantial fund servicing industry if ever significant numbers of individuals, such as fund accountants, decided to take equivalent jobs in other domiciles – or left the industry altogether. Many of Ireland’s fund accountants are relatively young and it might not take that much to persuade them to join the Irish Diaspora.

This is only likely to occur if a consensus emerges in Ireland that the country faces a long term slump in which property prices remain in the doldrums, or even decline further, whilst taxes (both direct and indirect) have to be increased yet again. At present the threat of a long term depression, as opposed to just a severe but short recession, is not likely to occur but is nonetheless a possibility. Much depends on how the world economy performs over the next year. If it continues to improve then this small and open economy should succeed in avoiding the long term slump that some fear.

In the video:

Industry professionals gathered in Dublin on June 18, 2010 to discuss what the future holds for Dublin as a fund domicile. Here are the key points which were discussed over fund servicing issues in Dublin, and whether or not Dublin will experience a re-domiciliation boom.