Is Ireland About To Go Bust?

The Irish Government, this afternoon, announced a tightening of its already draconian fiscal retrenchment. Having already proposed cutting Euros 3 billion from next year's budget, as part of a Euro 15 billion fiscal tightening, it now intends to double this figure to Euros 6 billion out of 2011's Budget, significantly front-loading the cuts.

As part of today's Budget statement, it announced that it sees GDP falling by 2% in 2010, but sees growth of 1.75% in 2011. Although this figure is lower than previous estimates, it is still highly questionable. Ireland and the UK's economies are closely linked with considerable trade between the two. Ironically, both the UK and irish Governments place an emphasis on exports as a means of providing growth, yet both governments are in a process of retrenchment that is likely to place severe limits on any potential growth from trade between the two economies. In the case of Ireland,it is likely to suffer a double whammy, because in addition to suffering its own knock-on effects from a reduction in UK growth following on from the UK Government's austerity measures, it is also going to suffer from a rapidly rising Euro, which is rising as the other side to a significant dollar weakness stemming from QEII in the US, and which saw Gold rise today by more than $40 an ounce!

The Euro is also rising because it is becoming clear that the ECB is pressing on relentlessly with its exit strategy from the monetary easing it introduced as a consequence of the Credit Crunch, and in response to the sovereign debt crisis that hit the PIIG economies in the Spring. Jean Claude Trichet, who is a fan of Austrian economics has an ideological bent towards the idea of monetary stringency. For some months now, the ECB has not been entering the Bond markets to buy up Government debt, which it began to do in the Spring. That is no doubt one reason that the Bond yields on PIIG economy debt has once more risen to those crisis levels.

At the ECB press conference this afternoon, one journalist from the FT asked Trichet, if the fact that the spread between yields on Irish debt and German Bunds was now as wide as that in the Spring between Greek Bonds and German Bunds, meant that Ireland would now have to be bailed out, in the same way that Greece had been. Trichet failed to answer referring questioners to the fact that the Irish Government would be making a Budget statement later in the day. He did, however, say that the Euros 15 billion of cuts already proposed by Ireland would not be sufficient to deal with its crisis! For now Ireland can get by. It does not need to go back to the international Bond Markets to raise money until next Spring. But, it is becoming clear that with the current - and rising - interest rates it is being asked to pay to raise money, it will not be able to raise money on international markets. It will be forced to either raise money through the EU facility, or else by going to the IMF. There seems little point in waiting until Spring to see if that situation changes rather than addressing this problem now. That is all the more the case given that it is not just ireland facing this problem. There is still a strong likelihood that Greece will have to restructure its debt - meaning it will effectively default on some debts coming due, and have to ask lenders to agree to roll over the payment date - and yields on the debt of Portugal are also rising. For now the pressure on Spain has reduced, but with more than 20% adult unemployment, and 40% youth unemployment, with an economy that was dependent on an inflated property market and construction that has collapsed, the resolution of other matters means that attention is now likely to turn back on peripheral EU economies like Spain. The more lenders fear one or more of these economies may default or restructure their debt, the more such a consequence is likely to show up the Bank Stress Tests as being a sham, the more slowing economic growth, and the pressures arising from a strong Euro, increase the likelihood of further bad debts being racked up by banks, the more those lenders will look to increase the risk premiums demanded, or else will begin to withdraw their funds from those dodgy economies, and look for safe havens in the Bonds of economies such as Germany and the US, increasing the yield spread even further, or will look to other safe haven assets such as Gold - one reason why it rose $40 today, and is forecast by some Gold traders to reach $2,000 (up 50%)in the next 6 months or so.

Ireland was one of the Tories poster children only a few months ago. They touted it as an example of the beneficial effects of cutting hard and fast. They don't mention it today. Its become like the mad relative kept in the attic. But, Ireland does provide an example of where the Liberal-Tory policies lead. They lead necessarily to an undermining of the economy, and the potential for growth. In so doing they undermine the very basis of resolving a debt crisis by sensible means, and instead lead to a self-reinforcing spiral of decline, whereby declining tax take and increasing expenditure raise the deficit, and cause concern in international Capital markets, and which in turn once that route has been started down becomes impossible to get out of, because a reversal of policy is seen as policy weakness and indecision. It is illiterate economics.