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Three Irish mistakes and going for broke

  • 19-11-2010 4:37pm
    #1
    IMFnow
    Closed Accounts Posts: 4 ✭


    An opinion piece on Ireland from outside our country:

    Three Irish mistakes and going for broke
    By Cees Bruggemans, Chief Economist FNB
    18 November 2010

    This is simpler than you think.

    During the past two decades, Ireland made three mistakes:
    • on joining the Euro, Ireland slashed its high interest rates to near German levels, creating cheap borrowing that would fuel a property boom. What it should have done simultaneously was to have tightened fiscal policy, running large budget surpluses, neutralizing any boom inclination. It could also have limited its banks’ property lending through higher, counter-cyclical capital requirements. It didn’t do either, but did grant tax cuts. It wanted a boom! And it a got one, the Celtic Tiger for a while being the envy of Europe.
    • Then when the 1990s boom started to fade, the Fianna Fail government artificially prolonged the Celtic Tiger boom “by giving extraordinary licence to its banker and building developer cronies that broke Ireland’s banks”.
    • And then when depositors started to flee wholesale from its bankrupted banks in late 2007, the Irish government’s ultimate fatal mistake was to step in to guarantee not just all depositors of Irish banks but also all their bondholders.
    With the Irish property collapse in full flood, and Irish banks thoroughly bust, the banks’ huge losses are now dragging down the Irish state with them.

    So far, the Irish government has pumped €50bn (equivalent to one-third of GDP) into its banks to keep them afloat, but to no apparent avail as depositors are again rapidly fleeing. An endgame is in progress.

    With private sources of funding closed to them, Irish banks have maintained themselves by relying on cheap unlimited ECB funding. Indeed, Irish banks represent one-quarter of the ECB’s emergency liquidity support (and a major latent liability?).

    So what is the endgame?

    ....

    [MOD]Copyright - it's the law. Pay attention to it. Anyone wanting to read the rest of the article will find it here: https://www.fnb.co.za/economics/servlet/Economics?ID=4995[/MOD]


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