Communique from the G20
As I see it, this constitutes most of the meat in the sandwich:
The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.
So, for now, there should be enough in the tank to lend Mr Cowan and Mr Lenihan when last September’s guarantee for the Irish banks gets called in…
David McWilliams estimates the size of Ireland’s bad loans to be around €40 billion Euro, or 25% of GDP. The budget deficit this year is estimated to be just less than half that amount. Ireland’s government debt to GDP ratio was 41% at the close of 2008 (source NTMA – http://www.ntma.ie/NationalDebt/debtGDP.php). This compares with a dept to GDP ration of 90% in 1990 (which fell to a low of less than 25%) and a debt to GDP ratio of nearly 200% in Japan before this crisis kicked off.
There’s no doubt government debt is going to balloon, but providing the structural deficit is addressed there’s no reason why it should end up any higher than Singapore’s debt-to-gdp ratio of 113%.
No need for the IMF, hopefully. Despite the threats of a ratings downgrade (delivered by S&P this week) the NTMA bond auctions have been oversubscribed, same can’t be said for our neighbours.
I asked John Kay about Ireland on Monday night. He said he feared they were next in line. I asked him why he thought that, and he pointed directly at the banks. Low government debt will be entirely besides the point if it finds it has endless amounts of debt to pay to keep the banks upright… No..?
Well,if it’s endless yes.
If McWilliams is right though and writing off the bad loans in the banks costs €40 billion or even twice that, and even with GDP contracting, if the budget deficit is shrinking, why wouldn’t the market lend to us when other countries are deeper in debt? When we ourselves have managed with relatively larger debts in the past?
But, even if the market doesn’t and we need to bring in the IMF (and I think this is ‘unthinkable’ within the Eurozone). Surely we’ll be borrowing to cover the deficit and the bad loans, not the entireity of the liabilities covered under the bank guarantee scheme? Unless there is a complete global collapse, most of their loans will be repaid (their assets have some value) enabling them to meet some portion of their liabilities themselves.
It’s difficult to get exact figures. Karl Whelan covered the Bacon plan on irisheconomy.ie – he’s not a fan, but the figures he’s playing with – are lower again than McWilliams’. Under his 2nd scenario the two main Irish banks could be given a clean bill of health for around 15 billion of tax payers money.
http://www.irisheconomy.ie/index.php/2009/03/20/two-scenarios-for-the-banks/#more-1165
(oddly the system won’t let me link to the Bacon plan in the Indo, says it’s blacklisted!).
I think “when” is the right word, since only a dreamer would believe that the banks won’t take full advantage of the taxpayers and write-down their assets during the period of the guarantee scheme. When that happens, 40 billion won’t cover a quarter of it. The figures you quote, Mack, while accurate are really academic at this point, and so I don’t feel the same optimism. This time next year, you’ll see why I warned you about the state underwriting these debts from the start. On the plus side, going to the IMF will see fiscal prudence imposed by that agency that is not possible within the Eurozone, so we’ll be out of the wretched thing and free to rebuild our economy of terra firma.
I think “when” is the right word, since only a dreamer would believe that the banks won’t take full advantage of the taxpayers and write-down their assets during the period of the guarantee scheme. When that happens, 40 billion won’t cover a quarter of it. The figures you quote, Mack, while accurate are really academic at this point, and so I don’t feel the same optimism. This time next year, you’ll see why I warned you about the state underwriting these debts from the start. On the plus side, going to the IMF will see fiscal prudence imposed by that agency that is not possible within the Eurozone, so we’ll be out of the wretched thing and free to rebuild our economy on terra firma.
If Josef Stiglitz were to be dead (he’s not)- he’d be turning in his grave at a handout of this scale to the IMF;
http://en.wikipedia.org/wiki/Globalization_and_Its_Discontents
Tantamount to giving the dissidents an atom bomb and telling them to solve the Ireland problem.
More from Karl Whelan on his alternative in today’s Times..
http://www.irishtimes.com/newspaper/finance/2009/0403/1224243926311.html