Key to Irish economic future is willingness of the bond market to fund the deficit

[patslatt]

Some business minded people believe that the government should be run like a business. The typical reaction of business leaders in a recession is to move quickly to slash costs and lay off workers in order to match spending to revenues. Usually,this reaction is precisely the wrong economic medicine in a recession,as government spending is needed to buoy up the economy,especially in the phase of steepest economic decline.

However,there was an Irish exceptional case in the late 1980s when the state's spending discipline was so poor that cutting government spending proved necessary to restore private sector confidence in the government's fiscal management. This paved the way for recovery in private investment.

The present massive government budget deficit arguably could be a similar exceptional case that calls for front end loaded cuts in government spending,as advocated in the recent Irish Times artcle by Peter Sutherland.

The government seems to be hoping that it isn't,since its €2 billion in cuts for this year is only a small start on the €20 billion in cuts that are needed to balance the budget.

The international bond market,the elephant in the corner and the government's paymaster, will have the final say on the efficacy of the government's strategy of back end loaded cuts. The bond market will probably lend to Ireland for a year,but if a looming crisis in Eastern European bond markets erupts into a panic, the interest rate on Irish debt issues could become so punitive that it would be just as painful as slashing spending.

And there would be little time to plan for it,so let's hope that the government has a carefully considered contingency slash and burn plan ready to be rolled out.

[TradCat]

It may well be in out interests for the bond market to cut off the supply of credit to our high-spending rulers.

[seabhcan]

How much savings do the citizens and businesses of Ireland have?

Would there be any merit in a patriotic call to move your savings to bonds? Or would this impact the banks?

[Libero]

However,there was an Irish exceptional case in the late 1980s when the state's spending discipline was so poor that cutting government spending proved necessary to restore private sector confidence in the government's fiscal management. This paved the way for recovery in private investment.

The present massive government budget deficit arguably could be a similar exceptional case that calls for front end loaded cuts in government spending,as advocated in the recent Irish Times artcle by Peter Sutherland.

Indeed, it arguably could be a similar exceptional case.

But neither you or Peter Sutherland have cited any real evidence to support this assertion.

Can you refer us to even a single academic study? One that would indicate that fiscal stabilisation was a key factor to Ireland's post-1980s economic growth? And that the effects of fiscal contraction were (eventually) outweighed by the effects of new confidence that the public finances were under control?

I see a danger that what you're saying becomes accepted wisdom without any real supporting evidence. We need evidence-based policy making, not going on a hunch.

It may well be in out interests for the bond market to cut off the supply of credit to our high-spending rulers.

Well, yes, if our interests don't extend to things like hospitals, police and welfare payments.

[geri]

Is this what Morgan Kelly was so fearful about in his article when he talked about the possibility of a sudden stop in international lending?

There is actually a worse scenario where international bond markets suffer a general panic, like 1998. Not only does Ireland gets torpedoed, but also Portugal, Italy, Greece, Spain and Austria. The IMF and EU simply would not have the resources to bail out so many economies and we would be entirely on our own.

In circumstances where the Government could not even pay public sector salaries, the bank guarantee would immediately become worthless and we would see an uncontrollable run on all the Irish banks.

Bank guarantee likely to deal a crippling blow to the economy - The Irish Times - Tue, Feb 17, 2009


Considering our recent performance on the international stage, how come they're still lending to us anyway?

[zakalwe1]

its time for a patriotic call to duty for the bond market and for it to put its shoulder to the wheel for the greater good.

i refuse to believe that international investors won't prop up FF like all good investors should.

[atlantic]

Will the EU create its own 27 country state bond ?Which in turn can be used to help any country in double trouble.They may, to stop the IMF stepping into the frame.

[20000miles]

Some business minded people believe that the government should be run like a business. The typical reaction of business leaders in a recession is to move quickly to slash costs and lay off workers in order to match spending to revenues. Usually,this reaction is precisely the wrong economic medicine in a recession,as government spending is needed to buoy up the economy,especially in the phase of steepest economic decline.

Please stop spreading the lies, patslatt. A recession is a response to an unsustainable boom, during which factors of production are misallocated. Therefore a recession ends when those malinvestments are liquidated and wages fall enough to re-employ the jobless. Anything the government does to stop this will prolong the misery.

[Conor]

Will the EU create its own 27 country state bond ?Which in turn can be used to help any country in double trouble.They may, to stop the IMF stepping into the frame.

Not likely - the idea's been poo-pooed. Speculation continues on aid for euro zone states - The Irish Times - Wed, Feb 25, 2009

I could see two possible alternatives:
(a) bilateral aid (i.e. Germany buys up a load of Irish debt) as mooted here.

(b) If the ECB drops rates to 1% and is unwilling to cut further, they could still apply monetary policy (or "quantitative easing") by buying up Government debt. It would be a political act to disproportionately weigh these purchases in favour of those who'd benefit from it most, and the ECB is loathe to act politically, but there are sound arguments for it - see here, if you're interested.

[patslatt]

Indeed, it arguably could be a similar exceptional case.

But neither you or Peter Sutherland have cited any real evidence to support this assertion.

Can you refer us to even a single academic study? One that would indicate that fiscal stabilisation was a key factor to Ireland's post-1980s economic growth? And that the effects of fiscal contraction were (eventually) outweighed by the effects of new confidence that the public finances were under control?

I see a danger that what you're saying becomes accepted wisdom without any real supporting evidence. We need evidence-based policy making, not going on a hunch.


Well, yes, if our interests don't extend to things like hospitals, police and welfare payments.

It is generally agreed that the late 1980s Tallaght strategy allowed MacSherry to make tough cuts in government spending which was extremely high as a percent of GNP then for a modest economy,around 55%. Recovery followed.