A world in economic crisis

Ireland–Moody’s cuts rating to just above junk bond status

The crisis in the Eurozone continues unabated. This time it is Ireland again. The credit rating agency Moody’s has cut its rating for the Government of Ireland to one rung above junk level.

The reason given for the cut in the credit rating is due to the weaker than expected economic growth. It is a decision that will hurt the Irish government as it struggles to impose austerity measures to help bring the country’s debt under control.

The cut in the credit rating also means that the Irish Government will have to pay more in interest for its debt raisings. This is a very bitter pill that it must swallow. Ireland cannot afford the increase in borrowing costs. Not only does it raise the cost of borrowing but with a rating just above junk level, it will actually mean that it will be harder to attract investors willing to purchase Irish government bonds.

Although I am not qualified to analyse the whole situation, I can at least speculate that until the Irish Government decides to change in regard to socialist policies aka the welfare state, then it will probably continue to struggle in this way.

It seems that the austerity measures that have been undertaken do not go far enough in changing the structural economic problems in Ireland. It will require not just the austerity measures that have already been undertaken, but a rethink on the welfare state.

Socialism is a failing system. In the long run it leads to economic decline. The economic pie is limited. If government is taking more than half of the pie then eventually there will be a point where the remaining few who are paying taxes will be unable to continue. Has Ireland reached that point? What about Greece?

Comments Off on Ireland–Moody’s cuts rating to just above junk bond status

Proposed Austerity Measures for Ireland

The BBC reports that the Irish Government is set to unveil new austerity measures as required by the EU-IMF rescue plan.

  • It will be a 4 year austerity plan targeting cuts of $15billion euros or 11% of Ireland’s output;
  • the aim is to bring down Ireland’s budget to 3% of GDP;
  • reform of the banking sector just falling short of nationalization;
  • the IMF recommends that Ireland should gradually cut the benefits to the long term unemployed;
  • the IMF also recommends that Ireland should reduce its minimum wage to be in line with the general fall in wage levels in the Eurozone;

There are some concerns about the proposed austerity measures. First the Cowan government could lose the support of the Independents plus some of his own party’s backbenchers. Second, the measures may prove self-defeating.

As expected, the stupid economist Krugman claims that the spending cuts will lead to a deeper recession. However, is this necessarily true?

European countries such as Ireland are in deep trouble because of their generous welfare state benefits. As a result of the generous benefits these countries have attracted immigrants from other parts of Europe as well as the Middle East and the sub-continent. These immigrants have a tendency to bludge on welfare instead of becoming wage-earners and tax-payers. They have a tendency to scam the welfare system. Like some of the long term unemployed who prefer being on the dole rather than worker, these people do need to have welfare benefits reduced in order to encourage them to seek out real work.  These Governments cannot continue to pay for their welfare state without a corresponding increase in taxes, either through increasing the tax rate or by the entry of more wage-earners into the tax system.

The Keynesian economics that lies behind the Krugman concerns have already failed in the past. Long term welfare payments will not get an economy out of its malaise. On top of that there is always the possibility that in the longer term these welfare payments will contribute to a return to the days of stagflation – high unemployment, high inflation and high interest rates.  Just like in the 1970s, such a return to stagflation would be a disaster.

Time to bailout Ireland–Remember PIGS

Posted in European Union, International Monetary Fund, Ireland, Ireland financial rescue by Aussie on November 24, 2010

When I first began this blog, and using the Internet as my source for information I came across the acronym PIGS – Portugal, Ireland, Greece and Spain. Well, Greece was the first to require a bailout, and there is still quite a bit of angst in Greece because of the austerity measures that have been visited upon the lazy Greeks. Ireland has been the next domino to fall, and the Irish Government has given in to the pressure to request a bailout.

It is interesting to note that the Green Party has had a significant role in this new situation. As I find out more about the Irish situation I will probably have more to say about the influence of the Watermelons, because it seems inevitable that the implementation of watermelon policies seems to end up in a disaster. (This is especially true in Spain because Spain wasted a lot of money on those uneconomic wind farms).

According to the German online magazine Der Spiegel (English Edition), Ireland has requested and the EU has agreed, to a bailout package. Ireland’s Prime Minister, Brian Cowan requested the financial assistance, said to be worth $100billion Euro and the finance ministers agreed to the request. The money is required to support Ireland’s ailing banks.

The political situation in Ireland is yet another one that can be considered interesting. The Watermelons have been in Coalition with Fianna Fail and Independents. Now the Watermelons are intending to pull out of the coalition and want Ireland to head to the polls in January to “end the uncertainty”. So once again we can see that the Green Party aka the Watermelons have had a sizeable influence on the Government of Ireland. (what could go wrong?)

So, why exactly did Ireland suddenly agree that it needed a bailout package?

Der Spiegel writes:

Justifying the request for help, Irish Finance Minister Brian Lenihan had said earlier on Sunday that his country had accumulated a deficit of €19 billion that it could not currently refinance on the financial markets. He said tens of billions of euros were probably needed to help ailing banks in the country, but insisted it would not be a "three-figure sum."

Lenihan insisted however that Ireland’s low 12.5 percent corporate tax would not be touched, despite calls from other European politicians for the tax rate to be raised.

The United Kingdom and Sweden, which are not euro-zone members, have also said they will provide bilateral aid to Ireland. British Chancellor George Osborne has agreed to pay 7.5 billion pounds (€8.8 billion or $12 billion) toward the bailout.

One very interesting point here, the company tax rate in Ireland is probably one of the lowest in the world.  I would have thought that lifting the company tax rate should be an option in order to raise more revenue for government. However, one thing to keep in mind is that the lower tax rate should be working as an incentive for international companies to invest in Ireland and start building up some industry. With such a low tax rate as an incentive, I would have expected that revenues for the government would have increased as new firms opened their doors for business in Ireland.  In other words, has this happened, and if not, why not?

Another question that needs to be asked is: exactly why has Ireland found it necessary to ask for help. Well this, it seems is the problem of being a part of the Eurozone. As we already know, Greece asked for and received financial help. In fact Greece was a real basket case. Spain remains on the precipice with regard to the help that will be required but what has this got to do with Ireland?

Der Spiegel writes:

Pressure on the Irish government to accept EU help had increased in recent days, in the hope that a rescue package would reassure the markets. Although the government does not need to immediately refinance its debt, Ireland’s problems have caused turbulence on the financial markets. Other beleaguered euro-zone countries such as Greece and Spain have seen their borrowing costs climb as a result, with rises in spreads on Irish, Greek, Portuguese and Italian government bonds.

Losses at five Irish banks have required a €45 billion bailout from the government at a time when tax revenues are significantly down due to the recession. The bank bailout has cannibalized the public finances, pushing the public deficit temporarily to 32 percent of GDP for 2010, 10 times that allowed by EU rules.

I have the following questions to ask:

1. why did the Irish government loan money to the Irish banks with public finance? Are these banks too big to fail?

2. what has been the impact on the Irish economy as a whole with regard to the world-wide recession?

I hope to find answers to those questions. At the same time I do suspect that the Irish government, like so many others has been busy wasting money on the useless implementation of Watermelon policies. It is also highly likely that the government coffers have been drained because of the welfare state. (stay tuned, I hope to find answers on these questions)