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Apocalypse soon

8 November 2010

3:23 PM

8 November 2010

3:23 PM

Writing in the Irish Times, Morgan Kelly has denigrated the Irish government’s handling of the economy. Comparisons are often
counter-factual – Irish politics is not divided along lines of left and right, and the Celtic Tiger was made of tissue paper. But, to English readers – servicing a colossal national debt with
their punitive tax bills, facing crumbling house prices, waiting for the moment when mortgages become beyond the reach of all but the cash rich, and encumbered with billions in worthless global
bank assets – it is a truly terrifying read. I urge CoffeeHousers’ to read the whole piece, but here is
its essence:

‘By next year Ireland will have run out of cash, and the terms of a formal bailout will have to be agreed. Our bill will be totted up and presented to us, along with terms for
repayment. On these terms hangs our future as a nation. We can only hope that, in return for being such good sports about the whole bondholder business and repaying European banks whose idea of a
sound investment was lending billions to Gleeson, Fitzpatrick and Fingleton, the Government can negotiate a low rate of interest.

With a sufficiently low interest rate on what we owe to Europe, a combination of economic growth and inflation will eventually erode away the debt, just as it did in the 1980s: we get to
survive.

How low is sufficiently low? Economists have a simple rule to calculate this. If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the
ratio of debt to national income will shrink through time. After a massive credit bubble and with a shaky international economy, our growth prospects for the next decade are poor, and prices
are likely to be static or falling. An interest rate beyond 2 per cent is likely to sink us.

This means that if we are forced to repay the ECB at the 5 per cent interest rate imposed on Greece, our debt will rise faster than our means of servicing it, and we will inevitably face a
State bankruptcy that will destroy what few shreds of our international reputation still remain.’

PS: In this context, you can understand why Angela Merkel has so been ferocious in her attempts to reconfigure the Lisbon Treaty to protect the German taxpayer from pan-European
bankruptcy.  


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