Monday, May 24, 2010

IRSH Times: Burden of Irish debt could yet eclipse that of Greece

A terrific article about debt problems and sovereignty, but this time about Ireland. Highly recommended.

IT IS no longer a question of whether Ireland will go bust, but when.
Unlike Greece, our woes do not stem from government debt, but instead
from the government’s open-ended guarantee to cover the losses of the
banking system out of its citizens’ wallets.

Even under the most
optimistic assumptions about government spending cuts and bank losses,
by 2012 Ireland will have a worse ratio of debt to national income than
the one that is sinking Greece.

On the face of it, Ireland’s debt
position does not appear catastrophic. At the start of the year,
Ireland’s government debt was two- thirds of GDP: only half the Greek
level. (The State also has financial assets equal to a quarter of GDP,
but so do most governments, so we will focus on the total debt.)

and this:

We can gain a sobering perspective on the impossible disproportion
between the bailout and our economic resources by looking at the US. The
government there set aside $700 billion (€557 billion) to buy troubled
bank assets, and the final cost to the American taxpayer is about $150
billion. These sound like, and are, astronomical numbers.

But when
you translate from the leviathan that is America to the minnow that is
Ireland, it would be equivalent to the Irish Government spending €7
billion on Nama, and eventually losing €1.5 billion in the process.
Pocket change by our standards.

Instead, our Government has
already committed itself to spend €70 billion (€40 billion on the
National Asset Management Agency – Nama – and €30 billion on
recapitalising banks), or half of the national income. That is 10 times
per head of population the amount the US spent to rescue itself from its
worst banking crisis since the Great Depression.

The author proposes a solution or at least a way out. A painful but possible way out. Read it all.