There are no signs that any of this is temporary or that adjustments made to date are sufficient to maintain access to credit. The initial austerity measures taken by the Irish government Ė tax increases and large cuts to public employee wages Ė seemed ambitious, but they turned out to be a drop in the bucket relative to the cost of the bank rescue. The Irish government created the National Asset Management Agency (NAMA) to acquire property development and commercial real estate assets from banks at a sizeable discount to par. As with similar schemes, this government-sponsored fund faces a catch-22: overpay for assets and transfer losses directly to taxpayers or drive a tough bargain and further expose the banksí insolvency. To date, NAMA has recorded Ä30 billion of losses, or more than 10% of GDP. S&P estimates that ultimate losses will be between 29% and 32% of GDP. To put this figure in perspective, this would be equivalent to U.S. taxpayer losses on Fannie Mae and Freddie Mac of $4.2 trillion, or about 11-times the CBO estimate of $380 billion.
Analysts on the political left are using the implosion of the Irish economy to advance their mistaken narrative about the supposed dangers of reductions in public expenditures. This overlooks that any savings generated by spending cuts were more than offset by outlays associated with the Ä90 billion NAMA to acquire bad loans in the banking system. While Ireland has made additional pledges to reduce the deficit to 3% of GDP in the medium term, its ďconsolidation plan would benefit from greater specificity,Ē as the IMF diplomatically puts it. In other words, Ireland has no credible plan to bring spending and revenues in line and has not done what is necessary to ďreduce the uncertainties associated with the consolidation process.Ē