Tag: Ireland

Will Ireland Default? Ask Belgium

By Simon Johnson

On the face of it, Ireland seems poised on the brink of default. Its debts are very large relative to the size of its economy, most of this money is owed to foreigners and – unless there is an unexpected growth miracle – the country will struggle to pay its debts in full for many years to come.

Yet all the indications are that, as part of the historic rescue package to be introduced this week by the European Union and the International Monetary Fund, Ireland will not default on or otherwise restructure its most substantial debts. Why not?

To be clear, Ireland owes a huge amount of money to the outside world. In the best scenario, Ireland’s government debt is likely to stabilize at more than 100 percent of gross national product (G. N. P.); in the worst scenario, with greater real estate losses and a deeper recession, this level could reach 150 percent. Continue reading “Will Ireland Default? Ask Belgium” →

Who Gains From The Eurozone Fiasco? China

By Simon Johnson

Ireland will get a package of support from the EU and the IMF.  Will the money and the accompanying policy changes be enough to stabilize the situation in Ireland or more broadly around Europe?  Does it prevent Ireland from restructuring its debt – or move the Irish (and other parts of the European periphery) further in that direction?

And who gains from the delay and mismanagement we continue to see at the highest European levels?

This is complicated economic chess within Ireland, across Europe, and at the international level.  In my Bloomberg column this morning, I suggest we look several moves ahead, recognizing the underlying political dynamic:

There is a much more general or global phenomenon in which powerful people cooperate to build an economic model that provides growth based on a great deal of debt. When the crisis comes, those who control the state try to save their favorite oligarchs, but there aren’t enough resources to go around

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Here is the present problem: It’s not just the Irish elite that is under pressure and struggling to sort out who should be saved. It’s also the European bankers who funded them. Continue reading “Who Gains From The Eurozone Fiasco? China” →

It’s Not About Ireland Anymore

By Simon Johnson

On the Project Syndicate website, Peter Boone and I argue, with regard to the European situation in this coming week:

The Germans, responding to the understandable public backlash against taxpayer-financed bailouts for banks and indebted countries, are sensibly calling for mechanisms to permit “wider burden sharing” – meaning losses for creditors. Yet their new proposals, which bizarrely imply that defaults can happen only after mid-2013, defy the basic economics of debt defaults.

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Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels. Continue reading “It’s Not About Ireland Anymore” →

Brady Bonds For The Eurozone, Starting With Ireland

By Peter Boone and Simon Johnson. This post comprises the opening paragraphs of a longer article available for free and without advertizing at Project Syndicate.

Today’s conventional view of the eurozone is that the crisis is over – the intense, often existential concern earlier this year about the common currency’s future has been assuaged, and everything now is back under control.

This is completely at odds with the facts. European bond markets are again delivering a chilling message to global policymakers. With bonds of “peripheral” eurozone nations continuing to fall in value, the risk of Irish, Greek, and Portuguese sovereign defaults is higher than ever.

This comes despite the combined bailout package that the European Union, International Monetary Fund, and European Central Bank created for Greece in May, and despite the ECB’s continuing program of buying peripheral EU countries’ bonds. Heading into its annual meetings in a few weeks (followed by the G-20 summit in Seoul in November), the IMF is bowing to pressure to drop ever-larger sums into the EU with ever-fewer conditions.

Indeed, official rhetoric has turned once again to trying to persuade markets to ignore reality. Patrick Honohan, the governor of Ireland’s central bank, has labeled the interest rates on Irish government bonds “ridiculous” (meaning ridiculously high), and IMF researchers argue that default in Ireland and Greece is “unnecessary, undesirable, and unlikely.”

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Read the rest of this article, with links to sources, at Project Syndicate: click here (or just use this address: http://www.project-syndicate.org/commentary/johnson12/English).  It’s free and no advertizing is involved; more about Project Syndicate here.

Irish Worries For The Global Economy

By Peter Boone and Simon Johnson

Is the global economic recovery still on track? The mainstream view is: yes, without a doubt. But increasingly, there are reasons to fear another financial disruption – particularly given the latest developments in Ireland.

The consensus among officials and most of the international banking community is that the global economy has stabilized and is now well down the road to recovery. The speed of this recovery is proving disappointing – as seen in the revised second-quarter growth estimate for gross domestic product in the United States, with annualized growth down to 1.6 percent. But, according to this view, easy monetary policy and still-loose fiscal policy around the world will keep sufficient momentum going.

Never mind that Japan, the United States and most of Europe are running unsustainable fiscal policies, while the Federal Reserve chairman Ben Bernanke is fretting over how to prevent deflation with a limited toolbox, and Jean-Claude Trichet, president of the European Central Bank, is calling for more fiscal tightening. To enjoy this rosy global picture, we are also told to ignore the plight of heavily indebted peripheral euro-zone nations still suffering from uncompetitive wages and prices, and concerns over default, that strangle their credit markets and growth. Continue reading “Irish Worries For The Global Economy” →

The Very Bad Luck of The Irish

By Peter Boone and Simon Johnson

With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

But the bank’s head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely. Continue reading “The Very Bad Luck of The Irish” →

Could The US Become Another Ireland?

By Peter Boone and Simon Johnson

As Greece acts in an intransigent manner, refusing to act decisively despite deep fiscal difficulties, the financial markets look on Ireland all the more favorably.  Ireland is seen as the poster child for prudent fiscal adjustment among the weaker eurozone countries. 

The Irish economy is in serious trouble.  Irish GDP declined 7.3% as of third quarter 2009 compared with third quarter 2008.  Exports were down 9% year-on-year in December.  House prices continue to fall.  While stuck in the eurozone, Ireland’s exchange rate cannot move relative to its major trading partners – it thus cannot improve competitiveness without drastic private sector wage cuts.  Yet investors are so pleased with the country that its bond yields imply just a one percent greater annual chance of default than Germany over the next five years.

Ireland’s perceived “success” is partly due to its draconian fiscal cuts.  The government has cut take home pay of public sector workers by roughly 20% since 2008 through lower wages, higher taxes, and increased pension payments.  As the head of the National Treasury Management Agency John Corrigan proudly advised the Greeks (and everyone else):  “You have to talk the talk and walk the walk”.

So is Ireland truly a model for Greece and other potential problems in Europe and elsewhere? Definitely not – but it does provide a cautionary tale regarding what could go wrong for all of us. Continue reading “Could The US Become Another Ireland?” →

Ireland And An Unstable Europe, Again

According to Bloomberg (citing the RTE website), the Irish Prime Minister said in Toyko today that Ireland may need to call in the IMF if economic conditions continue to deteriorate.  According to RTE (Ireland’s public broadcaster), correcting their earlier story, he said no such thing, at least in public.

The broader issue, of course, is that Ireland is not alone in facing economic difficulties – the risk of default, potential debt rollover issues, and credit ratings are likely to move together for a range of weaker countries in Europe’s eurozone.  But the presumption has been that the IMF would not get involved in eurozone countries.  Any change in this view would throw us back to thinking in terms of the 1970s (when the IMF lent to the UK and to Italy) or the 1930s (when IMF loans could have helped, but of course were not available). Unless you really intend to bring in the IMF for loan discussions, I would suggest it is a bad idea to use those three letters in any conversation, public or private.

Remember that in early October Ireland destabilized the eurozone by suddenly offering blanket bank deposit guarantees.  The apparent lack of policy coordination within the eurozone continues to be worrying.  These countries really need to start working together more closely.

Relatedly and consistent with my presentation last week, Greece’s sovereign credit rating from S&P was lowered today.