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Tuesday 26 April 2011

Restructuring (Again)

Richard Porte has a very balanced commentary up on VOX Eu that clearly outlines why a restructuring of our debt burden is inevitable, and shouldn’t be viewed as either a disaster or a failure of the system. In a very good overview of the situation he also makes the very valid point that some private burden sharing would go a long way towards countering the vast moral hazard situation this has been brought about as a result of the 100% guarantees that investors in Irish banking have been given by the government.

It’s well worth a read although he makes an odd point at the end about the current account deficit that I don’t really understand. We now have the odd situation that we have a current account surplus (Portes’ data is a little out of date) because it reflects trade balances and our export sector is doing particularly well. This helps avoid some liquidity problems depending on what the various parties do with it but that is not _our_ money, or at least not the Government’s money and it will have no real impact on the Government Deficit which is the thing that is giving me sleepless nights.

As I understand it we are currently running a Government Deficit of around €15-18bn a year. I’m not sure precisely because the numbers are hard to find but total annual expenditure is somewhere between €48bn and €51bn and total annual revenue is around €33bn. We have committed to reducing that difference it around €750m-1000m (2%) by 2014 (or thereabouts). That is on top of an existing fiscal adjustment that adds up to around €4.5bn between tax hikes and spending cuts.

Our progress so far has been pretty good – few other countries have ever managed to contract this fast while remaining stable – but the remaining gap is, as Portes points out, an heroically ambitious target. It might be possible but _even_ if we manage to do that we will still end up with a debt that is 120% of GDP and interest rates that are likely to be punitive. Future growth and our ability to maintain a stable society are certainly at significant risk if we do as we are asked, and then still find ourselves paying more to service debts than on anything else. 

The difference between what we spend now, and what we need to be spending is more than we spend on Health, Education or Social welfare. In effect we have committed to cuts that could be achieved by totally eliminating one of those. Obviously that wont happen but it is useful to clarify the scale of the heroic effort that we are going to have to put in in order to get out of this. Debt restructuring wont make that particular problem go away, but it will make it slightly less difficult to achieve, and it would at least make it possible that we could look forward to a future where a recovery was possible.

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