..is discussed in the Irish Times today by my UL colleague Donal Donovan. From the piece:
The prospects for Ireland being able to access sufficient market funding by late 2013 do not appear favourable. The lending environment for sovereigns in much of the euro zone has worsened steadily and, barring miracles in Greece and Spain, is unlikely to improve sharply soon. Notwithstanding Ireland’s Yes vote and continued adherence to the troika programme, we can’t avoid being affected by the general market nervousness. Ireland’s budget deficit, at 8-9 per cent of gross domestic product, remains the highest among debt-distressed euro zone members.
Even under favourable assumptions, without specific debt-alleviation measures, the debt to GDP ratio will be over 100 per cent – second only to Greece – for some time.
Despite encouraging words from European Central Bank president Mario Draghi, it is hard to be confident that the estimated €40 billion needed to cover the budget deficit and repay maturing debt obligations in 2014-2015 can be obtained at affordable market terms.
In today’s Sindo Colm puts the context around Willem Buiter’s comments earlier this week that Ireland might need a second bailout and should negotiate one in good time.
From Colm’s piece:
Economists who work for banks have acquired a bit of an image problem, well-deserved in many cases. Buiter is not one of these. Before joining Citicorp last year, Willem Buiter held economics professorships at Yale, Cambridge and the London School of Economics, three of the top economics departments in the world, and served a term on the Bank of England’s monetary policy committee. Along the way, he has built a reputation as a thoroughly competent analyst of the international monetary system, one of the best around. He did not come over to Dublin to shred his reputation with some off-the-wall comment about Ireland. With all due respect to Mr Noonan, Buiter’s comments are not “ludicrous”. They are consistent with the behaviour of interest rates on Irish bonds in the secondary market and with the arithmetic of debt sustainability.
It is difficult for politicians to stick with an unavoidable fiscal adjustment programme in the secure knowledge that it may not be enough to deliver its declared objective — an end to reliance on official lenders. That, unfortunately, is the position in which the Irish Government has been placed. The budget deficit needs to be eliminated, in any plausible scenario, and as quickly as possible. The small print in the Memorandum of Understanding with the EU and the IMF says that the temporary period of emergency lending will be over at the end of 2013 provided only that the budget tightening stays on track. Ireland will, according to the programme, be able to finance itself in the markets by 2014, without any support from official lenders. You either believe this or you do not. Most Irish economists do not, so Willem Buiter is not saying anything you have not heard before. The Government may well privately agree with this assessment, and their efforts to secure burden-sharing on the massive bank rescue costs suggest that they do. But they can hardly be expected to persist with tax increases and cutbacks while openly admitting that the planned deficit reduction will not be enough.
This is where Kevin O’Rourke’s work on the political trilemma is so useful. We have to consider the economic situation (and sets of constraints) at the same time as the political situation, with its attendant sets of constraints.
This is worth a thread on Irisheconomy: do commenters feel that a second bailout may be required? If so for how long? What conditions would you think might be attached to such a bailout? One really useful reading to think about this is the Fiscal Council report, pages 22-24 especially.
Colm is at his best in this Sindo column. Best bits:
Plan A has failed to create circumstances in which the three ‘rescued’ countries can return to the markets, the over-riding objective of any programme of official support. Their traded debt has collapsed in price and all three are rated junk by at least one of the bond-rating agencies. They will not be graduating from the programmes of official support anytime soon and the verdict of the markets, the only verdict that matters, is that Plan A is also junk.
The essence of Europe’s Plan A, as first applied to Greece, is to pretend that the problem is less serious than is actually the case, avoid any element of debt relief and insist that budgetary stringency alone will do the trick.
Persistence with Plan A and blaming the markets and ratings agencies is not a viable option should Spain and Italy go under. The game is up. Plan A is being quietly abandoned. In this sense, this has been a good week for Ireland.
Minister Noonan should now be seeking European support for an end to payments to holders of bonds, guaranteed or unguaranteed, in the Irish banks. Every cent paid to them is at the expense of the holders of Ireland’s sovereign debt, who have been treated in quite cavalier fashion at the behest of the European Central Bank and apparently in response to threats from this unique organisation.
ECB officials come and go but sovereign states need sovereign credit forever. It would be an unmitigated disaster if Ireland’s act of faith in Europe were to result in the first-ever default on the sovereign obligations of the State.
Many commentators have used the idea of “vicious cycles” or “feedback loops” to understand the virility of the financial and economic crisis. (A nice example is this influential piece from last year by Larry Summers on the American situation.)
This schematic attempts to capture some of the feedback loops operating between the Irish banks, public finances and growth. One way to think about it is to view all three as facing some nasty headwinds. For the real economy, growth is retarded by an impaired credit system, budgetary austerity and various multiplier/accelerator effects that intensify the recession. For the public finances, it is harder to stabilise in the face of costly of automatic stabilisers, bank bailout costs and a self-fulfilling loss of creditworthiness as the risk premium on Irish debt rises. And for the banks, they are strained by falling assets values, lost credibility of government guarantees and a slow motion run on wholesale deposits. Everything seems to feed negatively on everything else.
The adverse dynamics became overwhelming in recent months and international assistance has been required to prevent an effective collapse of the Irish economy. The “bailout” means that the Government has time to implement a phased deficit reduction rather than face a sudden stop of funding, and the banks have access to recapitalisation funds and continued large-scale funding from the ECB. This helps to ease some of the most virulent sources of negative feedback.
The question now is whether it will be enough. While in no way meaning to minimise the challenge, I think it is worth pointing out some potential sources of resilience in the system. On growth, there are encouraging signs that despite severe headwinds the real economy is holding up surprisingly well (see here). With capital spending 16 percent below profile, this is happening despite a fiscal adjustment this year that is not that much smaller than the €6 billion adjustment that the economy will have to bear next year.
On the banks, a key point of contention is the likely future deterioration in loans, and especially mortgages. Time will tell whether the resilience view of Elderfield/Honohan or the mass impairment view of Kelly/Matthews is correct.
On the public finances, the key resilience factor is the capacity of the political system to generate the necessary primary budget surplus over the four- to five-year timeframe. The coming months will be especially revealing on that score.