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| More surgery needed |
| Ian Campbell / Aug 27, 2010, 00:19 IST |
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Ireland: The Irish government's debt agency is right. Standard & Poor’s view on Ireland may be a worst case scenario. And yet the rating agency’s action in downgrading the country's debt does not look wrong. Ireland’s health is delicate. Further fiscal surgery is essential.
S&P’s view of Ireland has worsened because it has increased its estimate of the cost of bailing out the banks, in particular Anglo Irish Bank. It now puts the total cost of supporting the banking sector at £90 billion, or 58 per cent of GDP. The Irish government’s debt-to-GDP ratio will rise toward an extremely high 113 per cent of GDP in 2012, S&P predicts.
The Irish government has denounced S&P’s analysis in unusually strong terms. John Corrigan, the chief executive of the National Treasury Management Agency, says S&P wrongly ascribes no value at all to assets in Ireland’s NAMA “bad bank” or to the government’s £7 billion euro recapitalisation of Allied Irish Banks and Bank of Ireland, where Corrigan says the government fully expects to get all its money back. But the problem for Ireland is that the fiscal position and the projections for debt look very bad even on more optimistic assumptions about the value of the country’s distressed banking assets.
In July, the International Monetary Fund forecast that the Irish government's debt-to-GDP ratio would rise to 94.7 per cent of GDP in 2011 and would continue rising slowly to hit 97.7 per cent of GDP in 2014. These are very high figures. Ireland's debt was only about a quarter of GDP before the crisis. The danger is that the deterioration continues, driving up the yields on Irish bonds and leading to crisis.
Ireland's debt is growing far too fast because the fiscal deficit is much too big. The IMF forecasts fiscal deficits of 11.1 per cent of GDP in 2011 and 8.6 per cent in 2012. Unless the fiscal deficit is cut hard and fast, the country risks heading down the Greek road to crisis – and to what would be an uncomfortable testing of the zone’s new defences erected by the European Union.
Crash barriers are better left untested. The way for Ireland to avoid testing them is to be brave enough to cut the fiscal deficit much faster than currently planned.
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