economic situation is dire

[Awol]

Following on from Gringo's postabove reference Anglo Irish:

Ireland's austerity programme was bogus Ireland needs genuine cuts and to leave the euro if it wants to return to speedy economic growth, says Sam Bowman

It has not been a pleasant few days to be an Irishman. The Irish Government’s gamble in guaranteeing 100 per cent of all banking deposits, seen as a cheap way to avoid bank runs during the start of the financial crisis, committed it to enormous bailouts of any banks that ultimately did fail. This resulted in the Irish state having to bail out the property development bank Anglo Irish Bank last week.

It was confirmed that worst-case scenario bill for bailing out the Irish banks will be over €50bn – roughly €25,000 for every taxpayer in the country. To compound this, the "bad bank" set up to purchase toxic property development assets is likely to cost at least another €50bn. Although this is said to be a once-off bailout, it is likely that further injections of public money will be required in the years to come. Ireland has tried to spend its way out of a banking crisis – a mistake which may ultimately cause the collapse of the state’s finances.

Many in Britain have held Ireland up as a model of austerity because of cuts to expenditure made last year, but this misunderstands the true extent of Ireland’s difficulties. Ireland’s structural deficit of 12 percent – the worst in the EU – means that for every three euros the Irish Revenue brings in, five euros are spent by the government. Although some cuts have been made, Ireland’s government is still the most profligate borrower in the EU.

The consensus that some banks are "too big to fail" has ruined Ireland’s finances, and failure to make savage cuts in government spending may doom them. Bond markets agree: the Irish Minister for Finance is literally a laughing stock among bond investors. It hardly seems as if things can get worse for Ireland, but unless there is a swift change in the government’s thinking, things will.

Ireland’s addiction to spending funded by borrowing will cripple it. Like all addictions, the only cure is immediate abstention – a slow weaning-off will not work if the global economy continues to stagnate. The Irish government should end all non-essential expenditures immediately.

The Departments of the Arts, the Environment, Community Affairs and Defence should all be scrapped, along with their budgets. Free university tuition fees and all overseas development aid should be abolished. Ireland’s enormous social welfare budget, designed during years where mass unemployment seemed inconceivable, should be ruthlessly cut, so that they help only the very poor and unskilled. A fire sale of government assets (such as the state-owned gas and electricity companies) and the halting of capital expenditures would help to pay down the national debt and reduce interest payments. Further tax hikes should not be considered – these would make economic recovery even less likely.

In banking, the government should renounce its guarantee on deposits. It should sell off its stakes in Irish banks and allow the market to determine which fall and which stand. The taxpayer should not take responsibility for errors made in the banking sector, even if it was government policy that made these errors systemic. The Irish government should also consider leaving the euro – though this is a difficult time to do so, the euro is at the root of Ireland’s property bubble and the continued inability of her exports to compete internationally.

A joke that made the rounds in 2008 asked what the difference between Ireland and Iceland was – the answer being a few months and a letter. If only: Iceland’s financial cold shower has put it on the road to recovery, while Ireland has gone from crisis to crisis, with no end in sight.

I can't imagine that flogging off the family silver will appeal to many Irish people, but it appears the situation is pretty bad and without an obvious way out.

[peterms]

So, a fire-sale of state assets to private corporations in order to pay for the losses incurred by, er, private corporations? And cut the standard of living of the poorest to avoid any inconvenience for the bankers? The role of the state to squeeze the poor to protect the rich?

Sounds like a scenario from one of the less competent and more corrupt third world countries.

[Awol]

So, a fire-sale of state assets to private corporations in order to pay for the losses incurred by, er, private corporations? And cut the standard of living of the poorest to avoid any inconvenience for the bankers? The role of the state to squeeze the poor to protect the rich?

I agree with your POV Peter. The banks in most western countries have screwed up badly and due to government bailouts the various electorates are now carrying the can for their failures and greed. That said, public spending has clearly exceeded the genuine means of many national exchequers, because individual governments borrowed against an economic boom that was based on illusory property values.

Putting aside the unjustness and plain idiocy of that situation (we are where we are) what solutions are there?

Windfall taxes alone won't fix things, HSBC have already threatened to bugger off abroad if the Treasury really sting them and others are objecting to the possible split of investment and high street arms.

Beyond the current austerity measures to rebalance the books, maybe the question we should be asking is what to do if the banks need bailing out again? The results of those stress tests Gringo posted don't look great. If there are still toxic debts that are off the balance sheets of major lenders then the begging bowls might reappear at a time when fundamental reform of the sector is yet to take place.

What then, let them fail?

[Richard]

Higher growth than expected last quarter of 0.8%. Forecasts were around 0.4% so better performance which is encouraging

[snowychap]

Higher growth than expected last quarter of 0.8%. Forecasts were around 0.4% so better performance which is encouraging

Is it or does it just mean that the forecasts/forecasters were rubbish?

[Richard]

Well rubbish forecasts or not positive growth is positive, but that's my ideology coming out :winkold:

[Awol]

Well rubbish forecasts or not positive growth is positive, but that's my ideology coming out :winkold:

Also cost of borrowing is now at its lowest for decades which will save a substantial amount.

VT might not like these spending cuts but our creditors seem to.

[chrissmith921]

and the £ jumps against a couple of currencies which is superb as im off on holiday in a few weeks ta much!

[drat01]

:-) Jon - are you seriously trying to claim that these growth figures are as a result of the cuts just announced?

The initial figures are always treated with scepticism and no one should seriously use them as any sort of indication. I see that Gideon was trying to claim some sort of credit but we all know what an idiot he is.

The ConDem's claimed, or lied, about the state of the economy and subsequent figures have proven that Darling was correct in what he was saying. The last Q figures included a significant figure for building sector following many issues with bad weather in the winter. The building sector will be one of those massively hit by the rapid cuts that the Gvmt are proposing, so a great bit of sense there.

The GDP figures are interesting in terms of trending

The VAT rises, the massive and specific cuts against areas that cannot afford it will impact these figures in the coming months.

[Awol]

:-) Jon - are you seriously trying to claim that these growth figures are as a result of the cuts just announced?

I didn't say that, I said the lower rate of interest on our national borrowing is a direct consequence of coalition spending cuts - because it is.

The VAT rises, the massive and specific cuts against areas that cannot afford it will impact these figures in the coming months.

Yep, they will but we can't keep on borrowing billions upon billions every month to avoid raising VAT and cutting public spending.

I note Johnson (who as Shadow Chancellor doesn't even have a single O Level, what is that all about by the way?) has explicitly said he won't indicate any areas that Labour would cut, merely oppose what the government is doing. While a strong opposition voice is vital at times like this, it's hard to take him/them seriously when they won't indicate in any way what they think should be happening. Why? Well one can only assume it's because they are still as clueless now as they were in government.

A pity really.

[Richard]

Well rubbish forecasts or not positive growth is positive, but that's my ideology coming out :winkold:

Also cost of borrowing is now at its lowest for decades which will save a substantial amount.

VT might not like these spending cuts but our creditors seem to.

The national debt interest which is currently around 44BN is forecast to grow anyway over the next few years but the results of the CSR last week will save around 5BN in debt interest alone

[LondonLax]

Well rubbish forecasts or not positive growth is positive, but that's my ideology coming out :winkold:

Also cost of borrowing is now at its lowest for decades which will save a substantial amount.

VT might not like these spending cuts but our creditors seem to.

The cuts haven't actually come into force yet. These figures are from the previous three months.

[Awol]

Well rubbish forecasts or not positive growth is positive, but that's my ideology coming out :winkold:

Also cost of borrowing is now at its lowest for decades which will save a substantial amount.

VT might not like these spending cuts but our creditors seem to.

The cuts haven't actually come into force yet. These figures are from the previous three months.

I'm aware of that, but the fact that the cuts have been announced is the factor that has driven down the interest rates for government borrowing, which is what my post was about.

[Richard]

The ConDem's claimed, or lied, about the state of the economy

Really? Not sure how you can lie about the fact that we have a debt at around 1trillion, interest of 120M GBP per day and a deficit of around 150BN.

Actually I think you'll find it is the previous govt who lied about the state of the economy, until it came to chucking out time of course when Liam Byrne fessed up to there being no more money left

Still, do you think positive growth is encouraging or not Ian?

[Jon]

VT might not like these spending cuts but our creditors seem to.

I'd guess all those losing their jobs wont much care for the cuts either ....

[Jon]

Still, do you think positive growth is encouraging or not Ian?

I think any growth is obviously encouraging, although I do worry about it being

a) regional

at risk once the spending cuts bite into the economy.

To lay off that many Public Sector workers, and to cut the amount of benefits people get, will undoubteldy have a major impact upon spending power in the economy in the medium term ... hence worries of the old "double dip".

[snowychap]

Also cost of borrowing is now at its lowest for decades which will save a substantial amount.

How much of that is down to austerity plans and is it actually a good thing (other than the immediate savings in interest payments which ought to have an effect upon the forecast figure)?

Why government bond markets have become the latest mad and bad asset bubble.

The benchmark five year gilt yield fell to a new low of 1.43 per cent on Thursday, which astonishingly takes it to a 25 basis point discount to that of its German bund counterpart. The UK Government likes to think of the record lows to which gilt yields have sunk to be a vote of confidence by international investors in its plans for fiscal consolidation, and no doubt there is a small element of truth in this contention. But the main factors driving government bond yields ever lower, not just here in the UK, but in the US too, are much more worrying and have little to do with the bravery of George Osborne’s deficit reduction programme.

In essence, both the UK and US government bond markets have become giant bubbles which are now largely divorced from underlying realities and almost bound to end badly. Yes, for sure if the UK Government hadn’t done something about the deficit, then we might be looking at far less benign conditions in the gilts market, but just to repeat the point, it’s not really enhanced credit worthiness which is causing these abnormally low yields.

The US is experiencing much the same phenomenon, even though its public finances are in just as big a mess as the UK’s and it has virtually no plan that I can discern for deficit reduction, besides the wing and a prayer hope that growth will eventually come to the rescue.

So what’s really driving this dash for government debt? One possibility is that bond markets are already pricing in a depression, or at least a Japanese style lost decade of deflation. Despite ever more mountainous quantities of public debt, bond yields in Japan have been at abnormally low levels for years. Indeed, in Japan the abnormal is now normal. If you think the price of goods and services will soon be deflating, then even bonds on 1 per cent yields offer a healthy rate of return.

But no, the real reason lies in the market distortions that result from ultra easy monetary policy and the demands being put by regulators on banks to hold “riskless” assets. This is leading to a profound mis-pricing of government bonds, which now take virtually no account of significant medium term inflation risks.

If you think markets are always right, then bond prices are indeed signalling the inevitability of a depression, but if there is one thing we have been forced by the events of the last three years to relearn about markets it is that they are prone to episodes of extreme mispricing. The bond phenomenon is very likely one of them.

There are a number of ways in which bond markets are being distorted. One is regulatory demands on banks to hold bigger “liquidity buffers”. The asset of choice in boosting these buffers is government bonds. These have already been proved by Europe’s sovereign debt crisis to be very far from the “riskless” assets of regulatory supposition. Even so, banks are still being forced to max out on government debt.

A second distortion is caused by the “carry trade” opportunities of exceptionally low short term interest rates. Put crudely, you can borrow from the central bank for next to zero, lend the money out at a higher rate further up the yield curve, and pocket the difference. In a sense, that’s the purpose of ultra-easy monetary policy – to create a generally low interest rate environment – but the dangers of it are obvious. Central banks are creating a bubble in government debt.

And so to the biggest reason of the lot. Look at the chart above (created from Bloomberg data), which shows the yield gap between the five and thirty year gilt, and you can see that it has widened substantially over the past year. The reason is that investors are anticipating another bout of quantitative easing from the Bank of England. In the last round of QE, the Bank concentrated purchases initially on UK gilts in the five to 25 year range, but then widened this to include three year gilts and some 25 year plus bonds after running up against supply constraints. Investors are buying up the five year gilt because they know this is where the Bank, if it does more QE, will find most scarcity. Exactly the same thing is happening in the US, where more QE is already pretty much a done deal.

Anyone with half a brain can see that Germany is a rather more credit worthy and naturally inflation proofed country than either the UK or the US, yet the cost of five year money in Germany is now higher. How can this be? The explanation lies in the absence of overt QE in the eurozone. There have been no purchases of German bunds by the European Central Bank.

In fighting the aftermath of the last bubble by flooding the market with ultra-cheap liquidity, the Fed and the Bank of England seem only to be inflating new ones. There are others besides government bonds, commodities and emerging market assets being the most obvious. I’m not saying these policies are as a consequence flawed and wrong. That wider debate involves an altogether more complex and diverse range of issues. But the risks are self evident.

[snowychap]

do you think positive growth is encouraging or not?

It depends what is driving it, how sustainable it is and against what one is measuring it, doesn't it?

I have seen some arguing that, with all of the stimulus that the economy has had over the past couple of years, the growth is actually a little disappointing.

[mjmooney]

[leviramsey]

do you think positive growth is encouraging or not?

It depends what is driving it, how sustainable it is and against what one is measuring it, doesn't it?

I have seen some arguing that, with all of the stimulus that the economy has had over the past couple of years, the growth is actually a little disappointing.

And yet there are and will be those who say that more stimulus is needed...