Thank You, Minister Leo, For Your Two Big Feet

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A couple of cheers for Minister Leo, putting both his feet in the mouth of the Government. In a refreshing dose of realism he stated what everyone knows – we’re not going back to the markets anytime soon.

Unfortunately, this realism landed the Minister in a bit of warmish water. Not because of what he said, but because the Government is in denial. Are we going back to the markets in 2012? No. 2013? Ditto. We’re heading straight into the European Stability Mechanism which will, up to that point, mean that markets will continually price-in a default. That, alone, will keep us out of the markets. We are the verge of becoming a semi-permanent ward of the EU.

The Government may feel that denying the obvious gives it room for manoeuvre. This was the same logic the last Government relied on when denying the IMF was in town; denying it was seeking a bail-out; insisting the plan was working. Look how that turned out.

Now we’re getting this ‘we’re-not-Greece’ argument. We’ve had this type of arguments in the past. Remember all during 2009 – when Ministers and media were assuring us the markets were ‘happy’ with our irrational deflationary policies? At the beginning of 2009, Ireland had the highest borrowing costs in the EU-15 after Greece. At the end of 2009 – after an orgy of public spending cuts in three budgets – Ireland had the highest borrowing costs in the EU-15 after Greece.

Ministers and media commentators may have been ‘happy’; the markets were unimpressed (what investor puts their money into a county, a company or a household which is actually deflating its income?).

During the first Euro-crisis in April 2010 we were told not to worry – the markets knew we were not Spain or Portugal or Italy. They kept saying this even though the markets were pricing Irish debt higher – the highest in the EU-15 after Greece.

Greece was first into the bail-out; shortly afterwards, Ireland. Always after Greece.

So if Greece defaults, who is next in line? History is a wise teacher.

By 2015, the average debt of Eurozone members, excluding the three bail-out countries, is projected to be 69 percent of GDP; Irish debt is projected to be 111 percent. Irish debt as percentage of GNP is projected to be nearly 140 percent.

But here’s another way to measure the burden of debt: per every man, woman and child.

Minister Leo 1

By 2015, Ireland will have the highest debt per capital in the Eurozone – even higher than Greece. Of course, such stats do not tell the full story. For instance, Belgium is second in the debt per capita stakes (and they’ve been without a government for nearly half-a-year). Yet such is the strength of their economy that they have no come under pressure in the markets. Portugal, on the other hand, has a relatively low-level of debt per capita but is in the bail-out fund – such is the weakness of their economy.

What is clear, however, is that – unlike Belgium and other strong economies, or Italy and its reliance on domestic savings to fund its debt – Ireland has a weak economy with high unemployment, low-growth prospects and reliance on foreign markets for debt financing. In this situation, what chances of Ireland escaping EU ward status?

But what did we expect? We pursued irrational deflationary policies during the middle of a recession; we threw billions after billions at insolvent banks; it remains Government policy to proceed with borrowing €40 billion over the next 14 years to fund non-existent banks, Anglo-Irish and Irish Nationwide. You couldn’t come up with a better strategy to bring about a default if you tried.

So if Minister Leo’s comments have shined a little light on this darkness of denial and delusion, then that’s all for the good.

May the Minister’s feet continue to remain planted firmly in the Government’s mouth.

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One Response

  1. William Wall

    June 1, 2011 6:17 am

    Michael, I’ve been trying to work out what they (government) are up to. This seems to be their thinking:
    We reduce wages across all the sectors, starting with the Public Service and then allowing the bosses to use that as a way of driving everything else down. We just suffer the consequences (the government doesn’t have to suffer at all, of course). At the end of a (hopefully) specified period of time Ireland is a low-wage economy. At that point we are more attractive to inward investment so we introduce a stimulus package and begin building up the economy again (don’t ask me where ‘we’ will get the money). So their policy seems to be deflate first then start again.
    Do you think this is their strategy? And if it is, how would you respond to it?