Click here to listen to the Bloomberg interview with Patrick Honohan.
Category: Banking Crisis
Deutsche Bank have an online summary analysis of the problems facing the Irish economy (hat tip Turbulence Ahead). Overall, it provides a reasonable account of the current situation. However, it does perpetuate the misleading impression that the the scale of the Irish banking system is extraordinarily large relative to its GDP. As has been noted repeatedly on this blog and elsewhere in the domestic media, the aggregate statistics are dominated by the ‘pure offshore’ activities of international banks at the IFSC, with the ‘domestic’ component of the banking system large but not to this ‘off the charts’ extent.
The New York Times carries an article today about whether Europe is doing enough in terms of its institutional response to the financial crisis, whether in relation to management of sovereign risk in individual countries or in relation to the economic slump: you can read the article here.
The ECB released what looks to me like an important document on Friday. In response to a February 26 Communication from the European Commission, it sets out the ECB’s recommended guidelines on “asset support schemes”, i.e. over-priced purchases of impaired assets by the state or under-priced state insurance of these assets. I have described my objections to these proposals a number of times and won’t go into them again here. A quick look at the ECB document didn’t reveal anything that made me more convinced of the merits of these proposals (though I may report back after I’ve had a bit more time to read the document in detail).
In the Irish context, my concern is that the EU and ECB documents seem likely to convince the government that these schemes should be pursued. However, there are other ways to go about dealing with our banking problems and a broader debate needs to be had than simply focusing on the details of how asset support schemes should be implemented.
The lack of exposure to the international banking system had led many to hope that the Developing world would be somewhat sheltered from the fallout of the financial crisis. However it is becoming clear that this will not be the case.
The global economic downturn has already pushed 100 million people back into poverty, and the developing world is likely to experience a growing crisis of external finance over the coming months. Commodities prices (on which most of the developing world’s economies rely) have already begun to fall, and there are predictions of a 20% drop in non-oil commodities over the coming year. Similarly, as access to credit in the developed world contracts, sources of foreign direct investment and commercial lending to the developing world will dry up. So too will remittances which totalled an estimated $24 billion last year, and in Lesotho’s case, one quarter of its GDP. Household donations to NGOs are falling dramatically.
Worst of all, though is the risk that developing governments will begin curtail their foreign aid budgets. For sub-Saharan Africa, foreign assistance accounts for approximately half of all its external financing. Ireland was the first donor to cut its foreign aid budget. If other donors follow suit the developing world will be facing an economic downturn of massive proportions. History shows us that even the most resilient of donors, such as the Nordic Countries, can cut back greatly on Foreign Aid during a banking crisis. In the years after the Nordic Banking Crisis in 1991 we see the Aid budget, in real terms, falling in Sweden, by 17 per cent, in Finland by 62 per cent and Norway by 10 per cent.
Already economists are predicting that the effects will lead to significant human costs, with average life expectancy in Africa dropping by three years, and child mortality rising by up to 700,000 annually. Such volatility of aid supply will causes untold economic and fiscal difficulties for countries in the developing world, at a time when they need financial stability most. All the recent good work of Governments, Private Companies and NGOs will be lost.
It was only a few months ago we saw rising food costs as a real threat to our standards of living. Africa’s potential in agriculture was seen to be part of a global solution. The global problems around water, energy, food security and infectious diseases have not gone away but will get worse and haut us well after the current crisis is over.
Let’s maintain our commitment to Overseas Development Aid. Irish Aid has earned a massive international reputation for its work and the world has a lot of respect for the Irish Taxpayer and her drive to reaching ODA of .7 of GNP by 2012.
Niall Morris and Patrick Paul Walsh,
UCD SPIRe & Geary Institute