Ireland cannot afford debt, warns former IMF chief, Indo/NYT

[Arbitrager]

** Ireland cannot afford debt, warns former IMF chief**
independent.ie/business/irish/ir … 25378.html … Sunday September 05 2010

A former chief economist at the International Monetary Fund (IMF) has warned that by 2015 every Irish family will be in debt to the tune of €200,000 and that the children born in Ireland this year “will be paying off debts for decades to come”.
He has also warned that Ireland was effectively insolvent, with little chance of servicing its debts under current government policies, and that “financial markets are beginning to see Ireland as Europe’s next Greece”.
Writing for the New York Times on Thursday, Simon Johnson, former chief economist at the IMF, and Peter Boone, of the London School of Economics, said that, until recently, Ireland was considered Europe’s poster child of prudent reforms.
“However, it is now apparent that Ireland has not done enough to stem its march toward further crisis. The ultimate result of Ireland’s bank bailout exercise is obvious: one way or another, the Government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts.”
Johnson and Boone argue that the Government had the option of “more prudent policies” in dealing with the banking crisis and should have required bond holders to share some of the burden, rather than placing the entire responsibility on the taxpayers…

In Ireland, Dangers Still Loom
economix.blogs.nytimes.com/2010/ … more-80323 … September 2, 2010

However, let’s be clear: Europe’s headache remains large, and this should concern all of us. Just look at Ireland to see how misunderstood and immediate the remaining dangers are. Ireland’s difficulties arose because of a huge property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash in fall 2008: property prices fell more than 50 percent, construction and development stopped, and people stopped repaying loans. Today, roughly one-third of the loans on the balance sheets of major banks are nonperforming or “under surveillance”; that’s an astonishing 100 percent of gross national product, in terms of potentially bad debts.
The government responded to this with what are currently regarded as “standard” policies in Europe and the United States. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe’s next Greece. In the last few weeks, the perceived probability of default by Ireland (as traded in credit-default swap markets) has shot up, so that markets now price a 25 percent risk that Ireland will default within five years.

Until very recently, Ireland was seen as Europe’s poster child of prudent reforms. Mr. Trichet himself highlighted Ireland as an example that Greece and other financially stricken nations should follow. His message was simple: If only Greece or Portugal or Spain would cut public wages, reduce the budget deficit and make structural reforms as Ireland had done, then growth could occur and default could be prevented.
But it is now apparent that Ireland has not done enough to stem its march toward further crisis. The ultimate result of Ireland’s bank bailout exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts. According to the Royal Bank of Scotland, Irish banks have debt worth 26 billion euros, or one-fifth of Ireland’s national income, coming due in the month of September alone. Ireland’s third-largest bank just announced it was likely to need 25 billion euros in total capital injections from the government (19 percent of G.N.P.), while Standard & Poor’s argues that this figure is too low. In total, the debts of Irish banks could easily result in a charge to government debt equal to one-third of G.N.P.
These debts need to be added to the fiscal deficit, which also remains dangerously out of control. This year, the government will run a deficit of 15 percent of G.N.P., and with nominal G.N.P. falling, it could well remain that high next year, even if the government cuts spending by the 2 to 3 percent of G.N.P. currently envisaged.
The government is gambling that growth will recover to more than 4 percent a year starting in 2012, in order to make all this spending and debt affordable, and officials insist that growth is already under way. Ireland’s gross domestic product did grow in the first quarter of 2010, but that was not the good news that many news media and officials claimed.

This misunderstanding stems from Ireland’s success as a tax haven. Many years ago, Ireland cut corporate taxes to attract business. This created one of Europe’s most impressive tax havens — it is possible to set up a corporation in Ireland, channel sales through that head office (with some highly complicated links to offshore tax havens in order to avoid paying Irish tax) and then pay a minuscule corporate profits tax. Ireland boasts a large industry of foreign “tax minimizers” that do this, but these tax minimizers hardly employ any people. Nearly one-quarter of Irish G.D.P. comes from the profits of these ghost corporations…

[jpc]

The mood music is changing.
Get ready for FF’s next line of media spoof.

[xman]

A former chief economist at the International Monetary Fund (IMF) has warned that by 2015 every Irish family will be in debt to the tune of €200,000 and that the children born in Ireland this year “will be paying off debts for decades to come”. He has also warned that Ireland was effectively insolvent, with little chance of servicing its debts under current government policies, and that “financial markets are beginning to see Ireland as Europe’s next Greece”.

Sorry Mr Johnson, but acclaimed author broadcaster & economics expert Marc Coleman told me to ignore stuff like this. I don’t see enough balanced positivity here, people like you talking down this wonderful country, begone with your doom mongering.

We are also aiming to emulate Ethiopia’s & Bangladesh’s marvellous economic successes by increasing our population to 150 million by 2050. So families will only owe a tenner each and it’ll all be grand. Haven’t you read “The Best Is Yet To Come”

https://ecx.images-amazon.com/images/I/41Lj93UNffL.SL500_AA300.jpg

It’s available from all balanced positive bookshops. Buy one get ten free.

[Arbitrager]

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Readers Comments from the above article

Readers Comments … Tim O’Halloran, Dublin, September 2nd, 2010
It is worth repeating the salient part of this excellent article :

“Ireland had more prudent choices. It could have cut the budget deficit while also acknowledging insolvency and requiring creditors to share some of the burdens. But a strong lobby of real estate developers, the investors who bought banks’ bonds and politicians with links to the failed developments (and their bankers) prefer that taxpayers, rather than creditors, pay.”
This is a political crisis not merely an economic crisis. The root cause, as in the case of Iceland, is that small democracies are losing unequal struggles against oligarchies grown disproportionately fat as a result of globalisation. Because of the power of this small coterie, there was no warning in the media of the disastrous build-up of the housing bubble that caused Ireland’s crash. When the crisis broke in Irish banking, government policy exacerbated the crisis by foolishly guaranteeing all existing bank debts. This was done against the advice of civil servants and Merill Lynch, who had been especially hired in to advise the government. There has been much speculation as what higher authority over-ruled these experts, because the Prime minister and Finance Minister are both economically illiterate lawyers by profession. Presumably because of Ireland’s ridiculously severe libel laws, there has been little investigation of the advice tendered by the afore-mentioned oligarchs.

There is very tight news management in the last two years here in Ireland.(there is much concentration of ownership of media outlets, to put it mildly) Newspapers and television seem to have adopted a pretence that is their patriotic duty not to ‘damage confidence’. Readers of the New York Times business pages are far better informed as to the true state of affairs here than the average Irish citizen, most of whom believe the official line that the recession here is over. The ugly truth cannot be hidden for ever but don’t expect a change of government just yet. The main opposition party seems in no hurry to bring down the government, I suspect because it has no stomach for actually attempting to challenge the powerful forces that have a stranglehold over the current government’s policy.

economix.blogs.nytimes.com/2010/ … more-80323

[buddygunz]

Great comment albeit a highly depressing one.

[pa1]

I like Johnson’s concise and accurate summaries. There is no waffle here. That comment about media control in Ireland is so true.