*Irish* bank guarantee is killing economic growth…

It goes without saying that no one in the Republic would want to start from where they are now. But Garrett FitzGerald returns to a favourite theme of his, that the tax settings were too low in the past and that, despite having a national debt of less than 25% of GDP, it is now lurching towards an open ended economic crisis as predicted economic growth rates fail to materialise.

But Fianna Fail government is sticking with its steady as she goes routine. Today the Republic’s Minister for Enterprise, Trade and Innovation, Batt O’Keeffe, launched a broadside against Richard Bruton for suggesting that the government’s guarantee for the Irish bank’s bond holders was dragging the country down further:

‘Although the quarterly figures this week were weaker than expected, exports performed better than expected – and our recovery will be export-led.

‘This week’s Quarterly National Household Survey shows the decline in the number of people in work was the smallest since the recession began.

‘And the strong demand for bonds shows that investors have confidence in Ireland’s ability to meet our funding requirements.

Hmmm… As the FT points out, this demand comes at a hell of a price in interest repayments.

At a debt auction on Tuesday, Ireland was forced to pay a yield of 4.76 per cent for four year bonds – about what it would pay were it to access the European Financial Stability Facility. Weakening growth has pushed the country off-track in its fiscal consolidation.

And here, according to the FT, is Ireland’s dilemma:

Mr Cowen should cut the umbilical chord to the banking system by making it credible that bondholders will no longer be protected against all losses. This could only be done after enacting a special resolution regime such as the one the UK has adopted. It might mean an Irish banking system with fewer liabilities and more foreign ownership. But it would cut sovereign yields and set the deficit on a sustainable path. [emphasis added]

And it notes that “gross public debt may reach up to 136 per cent in 2014, once Dublin’s guarantees and estimated losses are added to its sovereign borrowings.” Eeek…

Last word to FitzGerald who notes that in the medium term the whole Irish political class faces a dilemma in how it informs the Irish state just under taxed it is, and how they are going to have to pay more:

It is obvious that, as we run ever shorter of further feasible spending cuts, whatever government is in power will have no choice but to turn to overdue tax increases to achieve our financial targets. However, an inevitable move towards normal levels of income taxation for a developed country will have to be gradual, spread over a number of years.

Finally, it is time to break the irresponsible silence – worthy of the Mafia’s omertà – that has enveloped this subject of Irish undertaxation, which media and politicians, business and unions, and even most academic economists – I exempt Prof Philip Lane in TCD – have preserved for so long.

If the public are left under the delusion that they are overtaxed, rather than grossly undertaxed, their reaction as taxes inevitably start to rise could be dangerously volatile.

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  • Itwas SammyMcNally whatdoneit

    If Ireland does not bail out the banks the belief is they wont be able to borrow the money to run the country and least that’s what most economists to think.

    Having said that we still dont seem to have proper clarity on exactly what makes up the banks bad debts and who the banks owe money to i.e. their bondholders.

  • Pippakin

    Lehman Brothers were allowed to fail so why not let Anglo Irish? It appears to be the biggest drain on the state. I know the arguments against but I’m not sure the current ‘winners’ of the argument are right.

    I believe G Fitzgerald is right but if he thinks FF will increase taxation during the run up to an election, forget it he knows they won’t.

  • Brian Walker

    “Unthinkable”, Brian Lenihan replies to the FT.

    http://www.insideireland.ie/index.cfm/section/news/ext/lenihanbank001

    Meanwhile, the Guardian returns to the attack, urging the coalition not to follow the Irish model..

    http://www.guardian.co.uk/commentisfree/2010/sep/24/recession-ireland-spain-recovery

  • Dan

    Forget the financial mumbo-jumbo, why exactly is Irish in quotemarks?

  • A.N.Other

    “It’s unthinkable that Ireland would default on senior debt or that Ireland’s banks would default on senior debt,” Lenihan said.

    Sadly, it was also unthinkable that the property market would collapse; that Anglo Irish Bank would fall from grace, and that Ireland’s year’s of growth would be washed away overnight because of crony capitalism.

    Lenihan has to say this doesn’t he. The ball is however out of his court; the Irish consumer remains highly leveraged; property prices continue to fall, and the full impact of austerity measures and budget cuts is unknown.

    No economic model can predict the future, as we all know only to well from the past.

  • Pippakin

    I read the link, Mr Lenihans comments are not exactly convincing.

  • GoldenFleece

    IMC will be rolling in, in a few months time, then all hell will break loose. Glad I’m living on the right side of the border this time.

  • Itwas SammyMcNally whatdoneit

    I may have missed it but cant remember seeing a simple breakdown of either who Anglo and the other Irish banks lent their money to i.e. what percentage to developers and what percentage to ordinary homeowners or a breakdown of who lent money to the banks i.e. who are the ‘bondholders’ and depostitors. Are the ‘bondholders’ other banks or governments or a mix of both plus private investors?

    We certainly should know the answer to the 2nd part of the question before deciding whether or not the government should have let or should now let them go bust. If the government now decided to let Anglo or others go bust and only pay depositors presumably that would mean they they just pissed the money already spent on the banks up against a wall.

    Some information may by confidential but surely there should be clarity on the nature of the loans which the banks have both given and received.

  • Watcher

    Garrett FitzGerald is absolutely right.

    There are however signs of sense coming back into play after years of madness.

    Its not so long ago in my last job that graduates in Dublin were starting on higher salaries than those of us in Belfast with 8/9 years experience.

    As GF says, taxation offers scope for Lenihan to generate some needed money.