Monday, July 18, 2011

Ireland's debt downgraded to junk

Last week, Moody's, the credit ratings agency, downgraded Ireland's sovereign debt to below investment grade or 'junk' status.

Investments funds generally specify the minimum rated debt that they can buy.

The following are 2 of a number of contributions to an Irish Economy thread on the development.

Samuel Johnson said that “when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” The prospect of losing a job in today’s money economy, which for some would be permanent unemployment, can have a similar impact.

Hugely consequential proposals can be made by people who are protected from the storm but for example introducing capital controls would likely trigger speculation about leaving the euro. The battered private sector would again be in the eye of the storm while public sector job guarantees would remain in place.

By the end of this year, from the start of 2008, about 5,300 Irish companies will have collapsed; many of the surviving ones have incurred bad debts from the bust companies while dealing with big falls in business during the recession.

There are tens of thousands of jobs in the SME sector in peril; while exceptions would likely be made for foreign payments for supplies where capital controls were in place, who overseas would provide credit?

How many here know what it’s like to arrange cash-flow each month for the payroll, where bank credit is restricted and customers have to be hounded to pay?

IFSC companies also use the domestic banking system as do the other FDI companies.

@ Aidan R 

Ireland has engaged in a fiscal adjustment equivalent to 14 percent of GDP. This is the LARGEST budgetary adjustment seen anywhere in the Western world.
It beggars belief that some still think more cuts in spending are required to fix Ireland’s economic woes (or that we did not cut more).

This argument has been made from 2008, usually by individuals from the public sector. In terms of income adjustments, most of the pain has been felt in the private sector. Self employed pension coverage was down to 36% in 2009 and is likely much lower now.

With about 75% of sovereign borrowings dependent on foreign lenders, what should we have done when a big global recession suggested that a recovery would take years?

There was no growth in jobs numbers in the internationally tradeable goods and services sectors in 1998-2008 as the workforce expanded by 25%; exports increased in nominal terms by 50% in 2000-2008 as the CPI rose 35%. However, additional output from the MNC sector is not permanent wealth.

In 2000-2008, GNP increased 74%; welfare spending +160%; health +186%; education +128%.

In 2010, current public spending was €61bn - - it was €52.5bn in 2007; In 2010, gross gov revenue was at €47bn - - it was €61bn in 2007.

The rise of unemployment and the legacy of the boom with possibly over 200,000 foreign nationals on welfare (78,000 adults are on the Live Register) are factors but the inconvenient truth is that there remain significant bubble gains in the system.

Just take one example: In Sweden, one of Europe’s best economies, MPs are paid 28% less than the standard pay of TDs and the Swedish expense system would certainly not enable an MP to have a second home paid by the taxpayer over the term of a mortgage. In Ireland today, independent TDs get an annual €41K tax free gift - - no audit, no need to say what it’s spent on - - called a ‘leader’s allowance’ in addition to normal lavish expenses. This payment amounts to 57% of a Swedish MP’s annual salary.

This litany could go on and on.

It’s interesting that the politicians and civil servants are the ones who have responsibility of rounding the circle. They also have been the big gainers from the bubble, despite some cuts, and will all be beneficiaries of an exclusive pension scheme.

Add in the ESRI, the Central Bank, the universities - - with the exception of Colm McCarthy who has had the experience of fighting for a living in the private sector - - and the trade unions who now mainly fight for public sector interests, is it any wonder that 4 years after the onset of the credit crunch, apart from short-term fire fighting, baby steps have only been taken in response to the bursting of the bubble?