Robert Peston: “the Irish economy is hideously and perilously balanced between recovery and Armageddon”

As John has noted, the Irish government is teetering on the brink of a lost confidence vote.  And the Anglo-Irish Bank’s credit rating has just been significantly downgraded by credit agency Moody’s, just as the Irish Finance Minister prepares to reveal how much more that bank will cost the state tax-payers. 

But a change in government won’t change the fundamentals. 

And, everyone’s hero, Robert Peston spells out the scary reality

All of which is to say that the banks and the Irish state are more-or-less one and the same thing right now. And the greater are the banks’ losses, the greater the strain on taxpayers.

What will determine those losses – in part – is whether house and property prices stabilise after their 40 to 60% falls since the end of 2006. It hasn’t happened yet, though the rate at which prices are falling has slowed down.

Of course, the great fear for the Irish government is that its putative virtue in making deep public spending cuts – and Mr Lenihan conceded that there are some big and painful decisions ahead – will further undermine confidence in the value of Irish assets, triggering further losses at banks, and thus eliminating the fiscal benefits of the deficit reduction programme.

Or to put it another way, it will be many months yet before Ireland can be certain it’s over the worst.

That’s presumably why Mr Lenihan didn’t rule out in his interview with me that the Irish government might eventually be obliged to ask for financial support from the European Financial Stability Facility, the special €440bn fund set up by eurozone members to lend to financially challenged eurozone states.

Naturally Mr Lenihan doesn’t want the national humiliation for Ireland of being the first eurozone member to tap the special bail-out fund set up after Greece went to the brink of insolvency in the spring.

Nor does he expect it.

But he daren’t say no, nay, never – for fear that those all-important overseas creditors lose confidence in the existence of backstop insurance to cover their cripplingly huge claims on the Irish banks and the Irish state.

Read the whole thing.

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