Ireland: great complexity

- "Ireland’s issues remain large and complex. Its economic, fiscal and financial sector problems are interconnected and considerable. Irish GDP is more than 10% below its peak in real terms and closer to 20% in nominal terms; this year, the Irish core government deficit is likely to be 12% of GDP, general government debt has risen by 60% of GDP since 2007; in addition, the balance sheet of its troubled banking sector is almost five times the size of annual GDP."
- "Although the recent widening in Irish government bond spreads appears to be related to issues in the financial sector, it is worth remembering that Ireland’s financial, fiscal and economic problems are interrelated."
- "The process of transferring troubled assets from banks’ balance sheets to the NAMA bad bank has revealed that the quality of those assets is far worse than expected – haircuts have been around 50% compared to expectations of much smaller discounts when the scheme was announced. And the government’s actual and contingent liabilities from the banking sector are considerable."
- "A large government deficit, combined with capital injections into the banks, means Irish government debt is likely to peak above 100% of GDP. If the government guaranteed NAMA bonds were also counted as government debt – they’re backed by assets, so it’s doubtful as to whether they should – then that number would be closer to 130% of GDP."
- "So markets are right to be concerned about Ireland. But there are several positive points that shouldn’t be disregarded. The process of deficit consolidation is well on track: the deficit has already started to fall. And the government’s strong political determination to reduce the deficit should once again be apparent in the budget later this year."
- "Ireland is also in an extremely strong financing position. This year’s funding needs have almost all been met. We estimate next year’s financing needs to be a manageable €30bn (18% of GDP). That’s especially the case as we think the Irish government holds over €20bn in cash, providing a considerable buffer if market conditions become problematic."
- "And perhaps more importantly, recovery is underway. Ireland is particularly sensitive to trade outside the euro area, so the euro’s recent decline, boosted by falling prices in Ireland, has led to a sharp improvement in competitiveness. That’s having an effect – industrial production is already back above its pre-recession peak."
- "Ireland’s problems are considerable, and will likely remain so for some time. But, so far, the government and the economy seem to be doing reasonably well at coping with and addressing them."

CreditSuisse European Economics 20100916

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