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In Ireland, Dangers Still Loom

The New York Times on the growing crisis in the Irish economy.

Until very recently, Ireland was seen as Europe’s poster child of prudent reforms. Mr. Trichet himself highlighted Ireland as an example that Greece and other financially stricken nations should follow. His message was simple: If only Greece or Portugal or Spain would cut public wages, reduce the budget deficit and make structural reforms as Ireland had done, then growth could occur and default could be prevented.

But it is now apparent that Ireland has not done enough to stem its march toward further crisis. The ultimate result of Ireland’s bank bailout exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts. According to the Royal Bank of Scotland, Irish banks have debt worth 26 billion euros, or one-fifth of Ireland’s national income, coming due in the month of September alone. Ireland’s third-largest bank just announced it was likely to need 25 billion euros in total capital injections from the government (19 percent of G.N.P.), while Standard & Poor’s argues that this figure is too low. In total, the debts of Irish banks could easily result in a charge to government debt equal to one-third of G.N.P.

These debts need to be added to the fiscal deficit, which also remains dangerously out of control. This year, the government will run a deficit of 15 percent of G.N.P., and with nominal G.N.P. falling, it could well remain that high next year, even if the government cuts spending by the 2 to 3 percent of G.N.P. currently envisaged…

Peter Boone is chairman of the charity Effective Intervention and a research associate at the Center for Economic Performance at the London School of Economics. He is also a principal in Salute Capital Management Ltd.  Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Read the full article from the New York Times Economix blog.

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