Ireland’s scary scenario
Posted by Neil Hume on Nov 01 11:00.
Presenting the Irish/German 10-year government bond spread…
… which has widened more than other peripheral spreads this Monday morning.
Traders are pinning the move on comments made by University Colleage Dublin’s influential economist Colm McCarthy over the weekend. In an article for the Irish Independent he outlined a scary (and probably realistic) scenario under which the Irish government is unable to fund itself and has to call in the IMF.
Now, McCarthy is not a completely objective observer. As the Indy notes, the economist wrote a report for the government that recommended budget cuts to generate cost savings of up to €5.3bn. His recommendations were largely ignored.
Even so, his comments are certainly sobering and likely to be taken seriously:
In what he calls a “scary scenario”, outlined in the Sunday Independent today, Mr McCarthy says “the game is up” if the Government flunks the Budget on December 7.
The sense of impending doom is also evident in the latest Sunday Independent/Quantum Research poll, which found that a massive 64 per cent believe it to be “inevitable” that Ireland will need the help of the IMF in the new year.
Mr McCarthy has said that if the Budget does “too little” to convince the financial markets, the Government will be unable to finance itself — “which means an IMF/European bail-out and economic policy dictated from outside the country for the first time since the State was founded”.
He warns that the country’s cash reserves will run low by next spring, unless Ireland re-enters the bond market with a “pretty big issue” of up to €5bn.
“Realistically, the Government needs to do this in January or February at the latest,” he says.
For now, the Irish government seems confident it will get the budget through, according to the Indy:
Government sources were yesterday confident that the Budget would be passed on December 7 and that there would be no defections from Fianna Fail, the Greens or by independent TDs who support the Government.
But McCarthy warns there really is no alternative to a tough budget:
“Those who object to a tough Budget on the grounds that it will weaken an already weak economy are whistling in the wind unless they can identify a less deflationary option. “It is not that we are living beyond our means: we are living beyond the willingness of lenders to lend,” he said.
Eek, Ireland! – FT Alphaville
So why is Ireland taking a break from selling bonds? – FT Alphaville