Right, stop me if I’ve got this wrong, but it seems to me that Ireland faces two big problems: bank liquidity; and a debt mountain (which has just got way bigger). In order to service the first, the second (whilst already large due to a massive fall in tax receipts) has been made unfeasibly high (how’s that small panic attack going Robert?).
The Economist has an obivious solution, but one that is not going to popular with European heads of Government: let Ireland, Greece and Portugal default. Their reasoning? Everything else the EU has tried has either failed or is in the process of failing. And not for the want of effort on Ireland’s (and Greece’s) part:
…the economies of both Greece and Ireland, Europe’s two “rescued” countries, are shrinking faster than expected, and bond yields, at almost 13% for Greece and over 10% for Ireland, remain stubbornly high. Investors plainly don’t believe the rescues will work.
They are right. These economies are on an unsustainable course, but not for lack of effort by their governments. Greece and Ireland have made heroic budget cuts. Greece is trying hard to free up its rigid economy. Portugal has lagged in scrapping stifling rules, but its fiscal tightening is bold. In all three places the outlook is darkening in large part because of mistakes made in Brussels, Frankfurt and Berlin.
As if that were not enough, the European Central Bank in Frankfurt seems set on raising interest rates on April 7th, which will strengthen the euro and further undermine the peripherals’ efforts to become more competitive (seearticle). Some politicians are still pushing daft demands, such as forcing Ireland to raise its corporate tax rate, which would block its best route to growth. Most pernicious, though, is the perverse logic of the euro zone’s rescue mechanisms. Europe’s leaders won’t hear of debt reduction now, but insist that any country requiring help from 2013 may then need to have its debt restructured and that new official lending will take priority over bondholders. The risk that investors could face a haircut in two years’ time keeps yields high today, which in turn blights the rescue plans.
It’s the equivalent of pushing the flailing economies’ heads back under the water, just as they are coming back up for air. Currently Ireland, Greece and Portugal are dependent upon Frau Bundeskanzerlin’s money, who, in turn, is prepared to wait a little longer in return for certain conditions.
But the Economist argues, feeding the debt mountain whilst simultaneously crippling Ireland’s recovery only intensifies the problem. They further suggest that the IMF call time on the internal politicking of the French and German (governments):
Its economists have the most experience of debt crises. Some privately acknowledge that debt restructuring is ultimately inevitable. It is time the Fund’s top brass said so publicly and, by refusing to lend more without a deal on debt, pushed Europe’s pusillanimous politicians into doing the right thing.