Close enough that prominent people are raising the spectre of capital account flight already underway.Â Today saw a bleak op-ed in the Irish Times by former European Commissioner and GATT/WTO head Peter Sutherland.Â Now Sutherland arguably got his hair singed on the other side of the crisis as a RBS Director (a position relinquished a few weeks ago).Â His key point is that a crisis could originate not from directly within the public finances (at least the finances as they were) or from bad loans of banks but from a loss of bank deposits and in that sense very much an emerging market style of crisis —
More importantly, the high level of risk aversion in the international markets means many investors are unwilling to give debtors the benefit of the doubt and promises of future fiscal corrections are being heavily discounted. Moreover, the funding risk for the Irish Government is amplified by its guarantee of the liabilities of the covered banks. While even the higher end of the projected scale of losses for the banking system does not pose a threat to the solvency of the Irish Government, a substantial decline in deposits in the banking system would increase funding pressures on it.
But are deposits actually leaving?Â Step forward well-connected politician and financial sector tea-leaf reader Senator Shane Ross (who perhaps gets too close to the financial sector players for his own good) with some interesting remarks in the Irish Senate today (note for those unfamiliar with Irish politics: the Senate is essentially a talking shop, with a few House of Lords-styleÂ delaying powers, but the format lends itself to a wider cast of characters than one would find in the lower house) —
we should recognise that the Irish economy is at the eleventh hour. We now face very serious circumstances. This was stated in some media so it is fair enough to talk about it publicly. People are delicate about what they say publicly about the state of the fragile economy because they do not want to rock the boat. That is a responsible position for all members of the Opposition.
Nobody should be in any doubt that billions of euro left this country for overseas destinations last week. Presumably billions of euro are still leaving as panic is beginning to occur in the money and currency markets. That is an indication of the kind of precipice we are now going over. There seems to be a lack of recognition of this on the Government side of this House because it does not want to face the true facts. The facts are really very serious. I do not say this lightly but believe there is an increasing number of warnings. If anybody goes overseas, he will hear the view of the Irish economy and note it is very different from the one conveyed by Members of this House, the Government and everybody else in Ireland. We are living in a foolâ€™s paradise and are very close to a disaster nationally.
Now, we don’t know what Shane Ross is hearing.Â It could just be idle chat along the lines of the PIIGS meme that is circulating among sovereign bond traders.Â Only people inside the banking system (and perhaps the ECB?) know for sure.Â
There are various bad scenarios for the global crisis and we know from Edward’s posts here the kind of new thinking that will be necessary if these scenarios unfold.Â But a crisis in Ireland, a Eurozone country with huge liabilities via its bank guarantee scheme, would be a sign that a major containment firewall has broken and the virus is loose (to mix metaphors).Â Thank God the Champions League matches are back to provide a distraction.