VOX: Ireland in Crisis

Written by Patrick Honohan and Philip Lane, there is a new essay posted on the VOX website that seeks to explain the current state of the Irish economy and recommends a shift in fiscal strategy: you can read it here.

Update:  A shorter version of the article appears in the March 1 edition of the Sunday Business Post.

Update:  The article is also cross-posted at Roubini Global Monitor.

4 replies on “VOX: Ireland in Crisis”

A sound recommendation. It doesn’t look though as if the government will listen till after the elections… href=”http://www.independent.ie/breaking-news/national-news/politics/lenihan-warns-of-more-tax-rises-but-excludes-income-tax-1655476.html”> given this.

I was struck by….
“even if loan losses come out at the high end of the range of estimates currently being entertained by analysts, the overall losses would not in themselves entail unaffordable additional government borrowing.” I would be very interested to see any evidence supporting such a statement.

I also agree with
“the gradualist path leaves the government vulnerable to FUNDING risk.”
The ultimate size of the required adjustment is one challenge. The intermediate path is just as challenging, and likely more fraught with danger given the global economic weakness in the months to come. It was less the size of Lehman or Icelandic liabilities that sank them in the end, then their funding difficulties. So we don’t want to confuse debt with flow. The modest size of debt to GDP is certainly advantageous, but gives insufficient protection per se.

I second that, however, the government still does not realise the scale of the fiscal adjustment that needs to take place. Despite my distaste for Fianna Fail, they have, at least, started to tackle the problem.


Raising money by selling government bonds will be difficult and expensive due to the flood of new bond issues by many other countries at the same time.

The government will also have to make some concessions to ordinary people in the form of taxes on the wealthy- especially bank management. Otherwise, we can forget about social partnership.

Ciaran: On evidence re analysts’ views on bank losses, well take for example, the reported February 16th estimate of Goodbody Stockbrokers that future loan losses would amount to €27.7 billion spread across the guaranteed banks. If I subtract each bank’s current equity capital from the Goodbody figure for that bank, I come up with a net shortfall of €10 billion. So there’s a lot of headroom there.

OK, so Goodbodys are a subsidiary of AIB, but take the Feb 26, projection from Goldman Sachs of an even smaller number for total prospective loan losses (€20 bn instead of €27.7 billion), which would imply almost no net Government outlay needed.

Of course there are some higher estimates mentioned in blogs, and I am sure there are some I have not seen even from reputable and experienced bank analysts, but this gives the flavour of why the quoted statement stands.

Two issues:

– very high degree of loan concentration means that any point estimate of loan losses comes with a very wide confidence interval.

– yes, equity bites it before govt does, so ito losses, it’s correct to deduct this cushion, but ito capitalisation, the banks would need to be adequately capitalised going forward, and hence any equity capital consumed by losses would need to be replenished, probably by govt [at this stage], so from a flow of funds perspective, the equity cushion is much less relevant.

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