Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

Wednesday, 14 April 2010 11:12

Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

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ZeroHedge ran an interesting article yesterday, IMF Prepares For Global Cataclysm, Expands Backup Rescue Facility By Half A Trillion For "Contribution To Global Financial Stability", stating that the IMF will surcharge larger developed countries to raise an enormous amount of money for what apparently is preparation for a massive increase in default risk throughout the world. One of the countries in line for a significant charge is Ireland. This is interesting, for it plays directly into the Pan-European Sovereign Debt Crisis theory that we have been working for all of 2010. It is our belief that the very real threat of defaults will reverberate throughout a material portion of Europe. Even countries that are supposed to be on the right track, are in reality, skating the brink of insolvency. A forensic look of Ireland brings this thesis into focus.

We have performed a cursory overview of the risks inherent in Ireland though previous "preview" posts: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook. For the most part, Ireland has considerable embedded risk through both foreign claims on troubled countries (ex. PIIGS) and significant bank NPAs as a percent of its GDP.

Below is an excerpt from our recent forensic Ireland analysis. Subsccribers, please download the most recent report here: File Icon Ireland public finances projections_040710 :

A deteriorating external environment and a correction in the domestic housing market made 2009 a difficult year for the Irish economy. Ireland's GDP growth registered a fall of 7.5% (the highest rate of decline since the country's records have been compiled) with a fiscal deficit of 11.7% of the GDP for 2009. Moreover, amidst an ailing banking system Ireland's economy is further expected to report a 1.3% decline in its GDP and a fiscal deficit of 11.6% of the GDP for 2010, as per the government estimates. Consequent to rising fiscal deficit, government's debt levels have also increased enormously from 24.8% of GDP in 2007 to 44.1% in 2008 and 64.5% in 2009. This rising debt is further fuelling an increase in fiscal deficit through an increase in interest expenditure. Thus, in its 2010 Budget, Ireland's government plans to secure structural improvements to the expenditure base, which is expected to result in a savings of €4 billion. However, considering the current economic slowdown and rising unemployment, deterioration in Ireland's tax revenues is expected to continue in 2010, which will negate the impact of expenditure savings, and result in further widening of the fiscal deficit to 12.6%, as per our estimates.

Moreover, as per the government's "Stability Programme Update - December 2009", the government plans to bring down its fiscal deficit from 11.7% in 2009 to 2.9% in 2014 (below the European Union target of 3%), primarily backed by a strong economic recovery starting 2011. However, we believe that this targeted reduction is based on overly optimistic growth targets, which are difficult to achieve.

The current government estimates fail to take into account additional funding that the government might have to infuse to stabilize Ireland's banking system, which will further increase the government's budget deficit.

According to Bloomberg (March 31), "Ireland's banks need $43 billion in new capital after "appalling" lending decisions left the country's financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system."

Ireland's banking system is critically dependent on the government for financing. At the end of January 2010, Central Bank of Ireland's lending to banks was €98 billion, which is equivalent of 60% of the country's 2009 annual GDP. Moreover, it represents 13% of total Eurosystem lending to banks compared with Ireland's 2% share of Eurozone GDP. Ireland's lending to banks is much higher compared to other troubled European countries - the Bank of Greece's lending to banks amounts to 20% of Greek GDP while numbers for Spain and Portugal are much lower.

In addition, Ireland (like practically every other country in the EU, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!) unrealistically optimistic in their GDP growth projections.

Moreover, similar concerns on GDP growth estimates were highlighted by the European Commission in its March 2010 report, “The budgetary outcomes could be worse than targeted in 2010 and considerably worse than targeted thereafter. The authorities should stand ready to take additional measures beyond the planned consolidation packages in case growth turned out to be lower than projected in the programme. The biggest problem is the Government's prediction that the economy will expand 3.3pc next year.” We have shown, beyond a shadow of a doubt, that the EU and the IMF have been dramatically optimistic concerning GDP growth and deficits regarding EU member countries ever since this "Asset Securitization Crisis" cum Pan-European Sovereign Debt Crisis (see the end of this post) began. Again, I reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

Consequently, for the aforementioned issues as well as a host of other reasons detailed in our subscriber forensic report ( Ireland public finances projections 2010-04-14 02:24:52 568.24 Kb), we believe that the government will over shoot its fiscal deficit target by 1% in 2010 and by much higher in 2011 and 2012, which in turn will result in higher debt and thus higher interest expenditure.