Ireland in need

Ireland is definitely facing a liquidity crisis, and that liquidity crisis could evolve rightly or wrongly into a solvency crisis. It needs help.

Like any such problem, that help involves emergency short term measures (basically cash funding) and long term advice and financing to solve its structural long term problems. In the next few weeks the short term problem is not the Irish state but the Irish banks. They need funding on a huge scale as their short term funding requirements are enormous, whilst confidence falters and money is withdrawn from the system by nervous counterparts. This difficulty will become a real burden on the Irish state next year as they have previously stated that they will be guaranteeing nearly all the liabilities of the Irish banking system. The ECB, European union members, and the IMF are fortunately all prepared to help. However, negotiating how much burden the Irish people should suffer in this emergency phase is going to be difficult. What can go wrong ?

Lenders tend to impose conditions when disbursing funds; enforced austerity and foregoing some sovereignty are painful for any nation, though more so in this case given the history of the Irish nation’s fight for self rule. Whilst Ireland can possibly claim it does not need help if it reduces or walks away from guaranteeing its banking system, simply copying the Icelandic approach to banking system failure might potentially cause more losses and chaos abroad than at home. Presumably a successful negotiation will result in an element of burden sharing.

The main problem over negotiations is probably going to centre on Ireland’s attractively low tax profile that encourages significant inward investment. This is a critical advantage for Ireland, which is seen as unfair in the European single market by its fellow members. From a European perspective these allowances take jobs and tax revenue away from them, whether it be multinationals or pop stars. However, this is a crucial advantage for Ireland – by giving up this competitive advantage Ireland would effectively accept short term relief whilst losing the long term advantage.

What about the long term ? I have argued here previously (see blog) that the long term problem (which is the root of this short term problem) is the inflexibility imposed on labour and capital markets by the single currency regime. In the short term hopefully the politicians and the financiers can get together to solve the immediate liquidity problem. But I still struggle to see how in the long run all Irish banking debt can be honoured and how being a member of the single currency regime is optimal for the Irish economy.

Discuss Article

  1. Jings says:

    I may only be a student of economics (and a late one at that aged 45) but I've never understood how you can have a single currency without a single state.  So likely this is a further step towards the end of the Euro or at least a step towards a smaller club with just Germany and France in it.

    Posted on: 19/11/10 | 12:00 am
  2. YouOKay says:

    Its a bit harsh I know, but I’m half expecting Bob Geldof to pop up somewhere and growl: ‘Give us your f’&%$^ money!’

    Posted on: 19/11/10 | 12:00 am
  3. nakedtraderclan says:

    i would be even more opinionated than a previous correspondent

    the single currency cannot ultimately work with independent states but i believe it was always accepted that it was flawed and would eventually in a recession period have unbearable strain. Failure and break up is not and never was the option so sovereign loss of power and further political union to avoid monetary meltdown was always the end game and this is now taking place

    voters would never have accepted political union but via a back door of rescues they have no choice but  to accept it in return for funding bailout

     

    Posted on: 19/11/10 | 12:00 am
  4. Anonymous says:

    The single currency regime doesn't impose inflexibility on the Irish labour market – it's the inflexibility of the labour market, in the sense that nominal wages are inflexible downwards, that makes the currency regime untenable.  

    Posted on: 19/11/10 | 12:00 am
  5. John McD. says:

    Put retail bank borrowers to one side, as they legitimately expect risk free savings from high st banks. But commercial and foreign lenders made considered judgements to lend, or invest, in Ireland. It is arguable this lending was part of the problem that contributed to the present situation. Surely it is now reasonable for them to share the pain. No doubt there will be some bleating, but responsibility and consequences must be shouldered.

    Posted on: 19/11/10 | 12:00 am
  6. Anonymous says:
    Add The Denominators Please
     
    As I watch the Irish financial implosion, I wish that politicians, central bankers, commentators and journalists would add a denominator to all of their pontifications. I would suggest the denominators of a) number of people in Ireland b) the number of taxpayers, and c) the number of taxpayers who pay 80% of the tax.
     
    Depending on estimates, the numerator which is the cost to the Irish taxpayer will total €50bn and €200bn. Lets call it €150bn.
     
    Here are some denominators that politicians should think about.
     
    Number of Individual Tax Filings in 2009: 3,100,000
    Number of Corporate Tax Filings in 2009: 156,000
    Number of Self Assesement Tax Filings: 600,000
     
    Pontificators should take the 200bn and included a denominator so they can see they are asking a country of 6mm people with 3mm workers to pay off €150bn in debt forced upon them by their own government. That equates to €40,000 per worker.
     
    3.1mm people filed tax returns with an average of €3820 per filing. There is no hope those people can pay off an additional €40,000 in debt any time soon. The 600,000 self assessment forms are probably a better indicator of the 20% of Irish society that pays 80% of the income tax. When you add that denominator to the €150bn, commentators will see they are asking the real tax base to take on €250,000 in debt.
     
    Politicians should be forced to look at this problem with a denominator. When they do that, it will become obvious that the Republic should default. The finance minister guaranteed the right hand side of the banks balance sheets with a stroke of a pen. The citizens should un-guarantee that mistake and vote to let the banks fail. This will give the bondholders the haircut they deserve for lending money to unadulterated real estate speculators.
     
    To believe 600,000 tax payers can afford the bailout is folly.
    Posted on: 20/11/10 | 12:00 am
  7. Anonymous says:

    Add The Denominators Please
     
    As I watch the Irish financial implosion, I wish that politicians, central bankers, commentators and journalists would add a denominator to all of their pontifications. I would suggest the denominators of a) number of people in Ireland b) the number of taxpayers, and c) the number of taxpayers who pay 80% of the tax.
     
    Depending on estimates, the numerator which is the cost to the Irish taxpayer will total €50bn and €200bn. Lets call it €150bn.
     
    Here are some denominators that politicians should think about.
     
    Number of Individual Tax Filings in 2009: 3,100,000
    Number of Corporate Tax Filings in 2009: 156,000
    Number of Self Assessment Tax Filings: 600,000
     
    Pontificators should take the 200bn and included a denominator so they can see they are asking a country of 6mm people with 3mm workers to pay off €150bn in debt forced upon them by their own government. That equates to €40,000 per worker.
     
    3.1mm people filed tax returns with an average of €3820 per filing. There is no hope those people can pay off an additional €40,000 in debt any time soon. The 600,000 self assessment forms are probably a better indicator of the 20% of Irish society that pays 80% of the income tax. When you add that denominator to the €150bn, commentators will see they are asking the real tax base to take on €250,000 in debt.
     
    Politicians should be forced to look at this problem with a denominator. When they do that, it will become obvious that the Republic should default. The finance minister guaranteed the right hand side of the banks balance sheets with a stroke of a pen. The citizens should un-guarantee that mistake and vote to let the banks fail. This will give the bondholders the haircut they deserve for lending money to unadulterated real estate speculators.
     
    To believe 600,000 tax payers can afford the bailout is folly.

    Posted on: 22/11/10 | 12:00 am
  8. longodds says:

    Re add the denominators

    Very good points. I remember when I worked for an international financial services company and was about to make my first visit to Ireland. Just before I left I got a call from the first local branch manager I was going to see – basically he called to tell me that if I didn't already know all anyone would be interested in talking about would be tax avoidance exercises – paying tax it seems was anathema to his clients.
    If the situation re percentage of those paying tax has not changed much a denominator is indeed very relevant

    Posted on: 22/11/10 | 12:00 am
  9. John Morten says:

    Mmm it's really like a game of poker and traditionally the Irish are far more prepared to risk all in what is a game of the highest stakes than the stiff necked Germans 😉

    At first sight the Irish appear to have a very poor hand but the more you think of it, the more it appears that the great European adventure is creaking at the bottom end and if Ireland are cast adrift contagion will quickly spread to the remaining Pigs and even to Paris!! So those flinty eyed Irish will sit and stare at their EU playing partners and accept the bail out cash and tell them in the immortal words of Father Jack to ''feck off' as far as increasing corporation tax rate. Who blinks first?? For my money Frau Merkel and her euro gang! As my dear old dad said ' never play cards with the Irish – they are prepared to risk the whole damned lot on the turn of a card'. Always listen to your dad!!

    Posted on: 23/11/10 | 12:00 am

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