Can Ireland EVER Pay Back Their Debts Without Debt Relief?

Despite the fact that the EU has determined that Ireland needs a bailout, the Irish, who have enough cash to last the next 12 months. They do not need any money from the EU, or IMF, until their €4.3 billion debt comes due in a year. Ireland got into this mess because the Irish government guaranteed the debts of all its banks, with estimates that this will ultimately cost €85 billion, which is over 50% of their GDP. Once these losses get added to Ireland’s total debt, then their debt outstanding will double to over 100% of GDP. 


Instead of seeking new aid, Ireland is hoping to pass an austerity budget, which is supposed to cut about €4 billion from their deficit, and they are hoping that the world rallies around their efforts, and lends them money when they need it. With the prospects of debt exceeding 100% of GDP, and with lingering questions about a further deterioration in the affairs of their banks, why would anyone lend money to the Irish government?


And why won’t Ireland request aid, and a bail out from the EU or IMF? Specifically, any IMF rescue comes with dramatic austerity measures, and Ireland would then lose the ability to determine the nature and severity of their cuts. The problem with IMF solutions is that the recommended austerity measures usually go hand in hand with a currency devaluation, which in turn helps that country improve their trade situation with the rest of the world. Yet, Ireland, Greece, or any country which is part of the European Monetary Unit, is that they are bound to the Euro, and in that context, cannot implement a currency devaluation, to offset the severe impact from an IMF designed austerity program.


Various voices within the EU wants Ireland to accept a bailout from the IMF, and the EU. Let me ask them this:


How is Ireland going to pay back their debts? In 2009, Ireland ran a €22 billion deficit, which was 14% of their GDP? How are they ever going to dig themselves out of this mess? Assuming that their debt costs are a modest 5%, then that means that they need to run that sort of surplus (before interest expenses), just to break even. Given that their debt costs are likely to remain above 5%, that means they need to run over a 5% surplus, before interest expenses. Digging out of this hole is going to be nearly impossible without throwing the country into a full blown depression. Add on top of this, the idea that 12% of Ireland’s housing market is underwater on their mortgages, the wealth effect is moving in reverse, which in turn, will compound the impact of a fiscal austerity package. And this will occur when the government will be needed to lead the country out of the depths of an impending recession/depression.


The bottom line is that Ireland will never be able to dig their way out of the hole they are in. The only real solution which can solve the problem with Ireland, Greece, and ultimately Portugal and Spain, will be some form of debt relief/forgiveness. This is not what the EU or IMF is prepared to do, but that will be the only way in which any of these PIIGS solve their debt problems.


The EU wants the debts of the defaulting countries to be borne by bond holders. This sounds fine, except for the fact that the Irish government has already immunized bond holders from a default of its banks, which is held by the following countries: $46bn German banks, $42bn British banks, $25bn US banks, and $21bn from French banks. Now the hot potato will be Irish government debt, but that potato will not get hot for a year, until the first debt maturity


The whole idea is to kick the can down the road, or extend and pretend. What they will not do is forgive and forget, yet this is going to be the price for the creation of debt beyond what borrowers can afford. At the end of the day, how will this debt get paid back, or more importantly, what will create the resolve of the German’s and the French, who effectively call the shots within the EU, to erase these debts? The Irish government has saved the German banks from taking losses on Irish bank debt. Who will save the holders of Irish government debt? As with Greece, extending the maturities of debt obligations will not save the day unless there is a mechanism to extinguish this debt.


A corollary to the Irish debt situation is the US housing market. However, with efforts afoot to create inflation, at least the US government has a mechanism to make these bad loans good. Unfortunately, they will do so by taxing the entire country in a slow and insidious way. This method, creating inflation, has been done before, and the Fed is working overtime to do so now. However, it is not certain whether the Fed can create inflation prior to the next deflationary surge.


The point I am going to leave you with is that until someone seriously gets on with a program of debt relief in the EU, rolling forward the problem is just going to make it a bigger problem in the future. It prevents me from embracing the idea that the world will live happily ever after.