Dublin Opinion

On May 10th, just after the EU announced its 750 bn Eurozone bailout Wolfgang Münchau from the FT said this:

“We know now that Greece, Portugal and Spain will always be able to refinance their government debt, but the long-term solvency position of the Spanish state remains unchanged. The private sector is massively indebted. The prices of assets that serve as collateral are still falling. The Spanish government, as guarantor of the banking sector, will be lumbered with rising debts at a time of stagnating economic growth. We should remember that solvency is not primarily related to financial markets’ willingness to lend. That’s liquidity. You are solvent when you can stabilise your debt as a proportion of income. Southern Europe’s solvency position is thus unaffected by the billions.”

Then last week, Morgan Kelly caused the usual nonsense when he splattered forth on how much he estimated the Irish taxpayer is likely to lose out on the bailout for Irish banks:

“So between developers, businesses, and personal loans, Irish banks are on track to lose nearly €50 billion if we are optimistic (and more likely closer to €70 billion), which translates into a bill for the taxpayer of over 30 per cent of GDP. The bank guarantee may have looked like “the cheapest bailout in the world, so far” in September 2008, but it is not looking that way now.

Adding these bank losses on to the national debt means we are facing a debt by late 2012 of 115 per cent of GDP. If we are lucky.

There is more. The ability of a government to service its debts depends on its tax base. In Ireland the proper measure of tax base, at least when it comes to increasing taxes, is not GDP (including profits of multinational firms, who will walk if we raise their taxes) but GNP (which is limited to Irish people, who are mostly stuck here). While for most countries the two measures are the same, in Ireland GDP is a quarter larger than GNP. This means our optimistic debt to GDP forecast of 115 per cent translates into a debt to GNP ratio of 140 per cent, worse than where Greece is now.

So both are agreed – it’s the level of debt stupid, and a nation’s ability to repay, not the level of liquidity that is available.

But considering that this fact is being ignored by the Irish government, who believe that they can continue to pump billions into Irish banking without any structural changes in the system while eviscerating the real economy, who can we rely on to tell them this and be sure that they will listen?

Morgan Kelly knows who, and it made me laugh out loud.

The one positive development in Ireland in recent months is that control of the banking system has passed from the Government to similar technocrats.

This transfer did not take place without a struggle – one that was entirely missed by the media. When Anglo announced they wanted to take over Quinn Insurance despite the objections of the Financial Regulator, journalists seemed to view this as just another case of Anglo being Anglo. They should have remembered that Anglo cannot now turn on a radiator unless the Department of Finance says so, and what was going on instead was a direct power struggle between the Financial Regulator and the Minister for Finance.

Having been forced to appoint a credible Financial Regulator and Central Bank governor – first-rate ones, in fact – the Government must do what they say. Were either Elderfield or Honohan to resign, Irish bonds would straight away turn to junk.

Well, it made me laugh, especially after reading this article from the current Phoenix – scanned here and here.