The Irish Economy? This blogger hasn't a clue.

It's a sad day when you have to admit that you haven't a clue about your favourite drunken topic. Mine is: "the Irish Economy: how we got into it, how we're getting out". QED. But today I realise this is just beyond me. In this, I'm totally clueless.

Irish government bonds traded at over 8% today (8th November) and at a 5.5% point premium over the German bund. This is truly shocking and incredibly serious for a country that is running a budget deficit of €19bn and faces a bank bailout of around €50bn, all of which needs to be financed on the international bond markets. (Well, not all of the bank bailout money will be borrowed, the investment into AIB and BoI coming from the National Pension Reserve Fund.) If this yield does not come down (significantly) then it's curtains for Ireland as a sovereign economy; we will have to be bailed-out by the European Commission/ECB and the International Monetary Fund.

It doesn't look as if the bond yield is going anywhere but up for the moment. So why is this and what can we do about it? (Seeing as, ya know, we're a sovereign economy an' all.) And why are our bonds trading at 8%? Well... that's the part I'm trying to figure out for myself.

1. In my last blog (Austerity Ireland) I mentioned Colm McCarthy; he says it's the €19bn deficit. And we're going to sort that out in the budget, so that's ok. We'll survive. Phew.

2. Then I read Morgan Kelly's piece in today's Irish Times. Kelly's analysis of the Irish banking boom and bust in the past few years has probably been the most precinct of anyone; so he's a serious guy. His analysis today of the current situation is staggering:

• The economy is already past the moment of no return. That occurred in September of this year when €55bn of Irish bank bonds were repaid, mostly from borrowings from the ECB. This was our last chance to relieve the Irish state of the bad debts of our financial institutions by implementing a debt for equity exchange with the bondholders.
• The real cost of the bank bailout will be €70bn, not €50bn as the government says. This is because the full extent of AIB and Bank of Ireland's bad property loans have to be faced up to.
• This means we are insolvent, with our liabilities outweighing our assets. Although, for the moment we're still liquid, with enough cash to keep us going until the summer. The ECB support to our banks in September also kicked the moment of reckoning down the path.
• The next (and final) stage of our financial crisis (collapse, really) is the looming wave of mortgage defaults (hundreds of thousands according to Kelly) that will finish off the Irish banks and, by way of the government guarantee, the Irish economy.
• This will force the ECB to stop quietly propping up the Irish banks and economy, acknowledge that we're bust and give us the bill to be repaid. If the interest rate demanded in the bail-out is too high, well.... we're right in it then.
• Kelly closes his article by saying he has no solution to this problem, that we now depend "on the kindness of strangers."

3. Then getting home I had a look at the Examiner (8th November, pg.13), which had an article from Tom O'Connor on my favourite drunken topic. He reckons the 8% bond yields are down to the governments failure to stimulate the economy. This, to me, seems to have ignored the simple fact that we're up to our necks in debt and need more of it. "Ah, nothing that a stimulus can't fix!"

All this, in particular the Kelly article, had my head spinning. Is it the banks? The deficit? The lack of stimulus? All? Some? None? For what its worth I reckon it the combination of the cost of the bank bailout and the deficit. (I don't think the bond market are particularly worried about a stimulus, especially since they are going to be the ones to pay for it. And it could be nothing more than a punt, seeing as Ireland is such an open economy and households are in such debt.)

As for a way out of this mess... Not a clue.