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Debt Crisis Unfolding – The Irish Story

 

Irish CDS spreads hit their highest this week since the height of the crisis amidst fear from investors that Ireland maybe into deep rescuing its banking sector. For now, the Irish Treasury has met its 2010 funding needs but a note from Barclays Capital indicates that the Irish state has the liquidity requirements but they worry about the soundness of the Irish economy and other macroeconomic conditions. In other words, this whole thing is not very robust; it is more bootstrapping for the moment as evidenced by the bonds spread.

Ireland is a good example of an economy that was fuelled by cheap credit and low taxes which stimulated a property bubble (Ah the Celtic Tiger!). It is not only the fact that big property project get cancelled (like the U2 Tower), that they have to bulldoze entire housing project to restore a balance in supply and demand or that property prices are in free fall – on the other side of the trade – you have the banks who are left holding the bag of bad loans that can’t never be paid back. What happens next is the state, the taxpayers who has to come in and save the banks. Anglo Irish Bank (state owned) has been split in two new entities but still, that operation has already cost the Irish Treasury 25B euros. They also have the Bank of Ireland (state owned) and Allied Bank (partially state owned) which are essentially in the same situation. It is estimated that the banks’ bailout in Ireland is costing them about 25% of GDP. Now can someone explain to me how these new chains around the taxpayers’ neck are going to help the productive Ireland economy?

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Articles by MJ Loiselle, the MJ Economics web site and the MJ Economics Newsletter ("MJ Economics publications") are published by MJ Economics, a division of Nuno ID Inc. Information contained in MJ Economics publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in MJ Economics publications is not intended to constitute individual investment advice and is not designed to meet individual financial situations. The opinions expressed in MJ Economics publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and MJ Economics has no obligation to update any such information.