Irish budget cuts: Not speculation, or existentialism but hard-nosed finance

Lot’s of really interesting snippets in the Sunday Business Post. Two struck me as worth noting. The first notes that after a narrowing of the interest rates on the bond market, Ireland’s rate of borrowing is getting more expensive again. By Friday evening, ten year Irish bond interest rates were trading at about 4.7%, about 2% above that of German debt and above that of Portugal.

The second (and I suspect it’s not entirely unrelated) is the news that the Department of Finance in Dublin is looking for 5% cuts from each and everyone of the Republic’s government departments. This is pretty much in line with recommendations by Professor Colm McCarthy’s committee (aka An Bord Snip Nua). The departments have until next Friday to respond with their proposals.

As Alan Ruddock notes, Minister Lenihan’s biggest problem may be that:

“…despite two years of recession, a banking collapse of epic proportions and a horrendous rise in unemployment, the true awfulness of Ireland’s predicament has not dawned on many of his government colleagues or the public-sector trade unions.”

He goes on to summarise the scale and the nature of the problem:

“The unions and their members, however, do not seem to realise that the world has changed. A government that spends €20bn more than it earns in tax revenues cannot continue to function, particularly when the investors it borrows from demand ever higher rates of interest, or simply refuse to lend. Even with the benefit of a weak euro, the Irish economy will not grow so quickly that the gap is closed by booming tax revenues.

“The gap between spending and tax revenues will close when recovery is strong, but recovery will not eradicate the underlying problems. By the time that happens, the size of the national debt will have swollen to levels that exceed Greece’s current level. Layered on top will be the debts associated with the massive banking rescue — the cost of funding the National Asset Management Agency and the recapitalisation costs of the failed Irish banks.”

And at the heel of the hunt, as things are currently configured, it looks like McCarthy’s cuts will be far from the end:

…next year Lenihan will have to do it all over again. There is no quick fix to Ireland’s difficulties (short of a debt default) and the next decade will be a long, hard slog to reduce borrowings, pay down debt and restore competitiveness.

That is why the markets have taken fright: investors look at the eurozone and when they get past the fog of confusion that swirls around its leaders they see a mountain of debt on the periphery of the eurozone which is compounded by a loss of competitiveness. The natural reaction is to sell euro assets because the risks attached to them are too high.

This is not speculation, or existentialism at work, it is hard-nosed finance at work. The message from the markets is that our immediate future is grim: spending cuts, higher taxes, jobless growth when the recovery comes.

We can expect little sympathy from the Germans who have already been through the tough post-unification years, suffering cuts in their standards of living as the periphery partied. Now we have the hangover and they look askance at our problems, reluctant to foot our bills but knowing they have little choice.