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poor Ireland « Previous | |Next »
November 21, 2010

The bubbly Irish Celtic tiger on the European periphery is no more, if it ever was. Dublin house prices have fallen by 25% and the properties are unsaleable because banks cannot lend to buyers. The country's budget deficit is forecast to reach 32 per cent next year and it faces E30 billion cuts to state expenditure.

The suits from the International Monetary Fund will arrive in Dublin next week to clean up the mess from the fat cats economic model that provided growth based on a great deal of debt (casino capitalism?) and to bail out the Irish state with emergency funding from the collapse of the vast property bubble. Ireland will eventually seek and get a package of financial support from the EU and the IMF.

Like Greece more public debt is piled onto a nation that is probably already insolvent. The response to the global financial crisis has been to bail out the bank creditors while foisting the burden of adjustment on taxpayers. The Irish government had, for no good reason, nationalized the debts of its failing private banks, passing on the burden to its increasingly poor citizens. One reason is that banks became too large relative to the Irish economy and along the way, they captured their regulators.

BellSIrelandbailout.jpg Steve Bell

As the authors of Baseline Scenario argue if the state takes on too large a debt in response to the global financial crisis, then sovereign default is the natural outcome. Greece and Ireland need debt relief---a reduction of the public debt.

That is the most realistic scenario since, as it is highly unlikely that Ireland will experience strong economic growth miracle, the debt numbers are stacked too high against Ireland--Simon Johnson and Peter Boone point out at Project Syndicate that for Ireland (as for Greece) , sovereign debt, including bridge financing, will rise close to 150% of GNP by 2014, and is mostly external.

Once social spending is cut and taxes are raised in order to shift as much of the costs from the Irish banking fat cat elite to ordinary citizens, then the axe shifts to the European bankers who funded the Irish banks. So Ireland's problem is an EU problem -- no doubt the big German and French banks are pointing out to their governments that when Ireland defaults, they will face big losses too. Will they take a haircut? Or will the EU bail them out?

| Posted by Gary Sauer-Thompson at 7:31 AM | | Comments (9)
Comments

Comments

ouch, this is going to hurt

The cost of saving the debt-ridden Irish banks is huge. Estimates say it is around $80 billion. The Irish banks though guaranteed, indeed part-owned, by the state faced a steady loss of deposits. Investors were taking their money home. So the banks became increasingly dependent on support from the European Central Bank.

Two down – Greece and Ireland – how many to go?

Ireland must accept a European bail-out. However, he EU and the European Central Bank are not negotiating to save Ireland, they are negotiating to save themselves.

If the Irish Republic cannot repay its debts, it will be its creditors in Britain, Germany and other larger nations that lose. And if Dublin defaults, the next domino to fall could be Portugal with the risk that Spain becomes the next target.

Ireland has conceded for the first time that it could not tackle its ailing banking system without international help. This helps secure government debts, which have rocketed since the government agreed to underwrite the country's five main banks.the rationale was that this was to prevent a collapse in confidence and a devastating bank run.

Without it Ireland's cost of borrowing in the market would rise to unsustainably high levels.

The IMF calls it 'tough love' in crisis situations. The Irish economy has already shrunk by nearly 20% since 2007, and taking even more demand out of the economy through tax increases and spending cuts would simply extend the downturn to perhaps six years.

Eventually the Irish are going to have enough of austerity's tough love to deflate their economy to drive costs down.

It was the decision by Brian Cowen, the Fianna Fail prime minister, on September 30th 2008, to provide blanket guarantee of all their deposits and most of the bank debts in Ireland. Though some sort of guarantee was necessary to stem a run on deposits and to prevent a collapse in the banking system and the economy, the guarantee need not have been quite so broad.

The banking sectors' collapse is the heart of the problem. Irish banks borrowed gaily in the international wholesale markets to finance a property development bubble that at its peak amounted to more than one-fifth of the country’s economic output. After the bubble burst the Irish banks relied on funds from the European Central Bank (ECB) to ensure their liquidity, but it was not sustainable. The Irish state had to do something to restore confidence in its banking sector.

The guarantee limited the state’s ability to force losses on the banks’ bondholders and left the public finances in ruins. The state has incurred a bill that has now reached almost a third of GDP. So the banking crisis has merged into the sovereign fiscal crisis.

That means tackling the deficit with austerity measures, which in turn means depressed wages and higher taxes. As a member of the euro, Ireland cannot devalue its currency. So wages have to come down to regain cost competitiveness.

So there will be little improvement in average living standards for quite some time.

the big fear is contagion---the Irish banking system triggering sovereign debt problems to other peripheral eurozone members.

Portugal would be the next domino to fall but the real concern is Spain, which, like Ireland, is suffering the after-effects of a bubble in its housing market. Spain has 20% unemployment, rising to 40% for young workers, and is ripe for a fresh downturn.

Ireland's sovereign debt crisis is now causing a political crisis for the Fianna Fail-Green coalition government that survives on a wafer thin majority.

The Irish sovereignty debt crisis is the flash point in the ongoing global financial crisis. The European banking system is already in a fragile state and will have difficulty coping with a series of sovereign defaults.The German banks may need to be bailed out because of their heavy debts incurred from going wild---lending to all and sundry without due diligence.

The most likely trigger for sovereign defaults in the next few years is a prolonged period of slow growth

the problem that arises with free market economics is that it holds that the market economy should be left alone as much as possible, and that it is good that governments do that.

The problem here is that for this type of economics bubbles simply did not exist – which meant that actual bubbles are, and were, allowed to grow; and that governments do not need to adopt policies to counter them.

What happened is the governments in the US and Ireland allowed the financial market to spin wildly until it broke down. Now these countries run the risk of years of economic malaise. The next decade will, in all probability, be the 'lost decade' .