Ireland Won’t Be Going To The IMF

This is very reassuring news. I slept a lot better last night after reading it.

The International Monetary Fund said on Wednesday there was no reason to think that Ireland will need IMF financing, after an Irish broadcaster reported that the country may need IMF help if its economic prospects worsened. Irish Prime Minister Brian Cowen, on a visit to Japan, quickly denied the report by broadcaster RTE which was picked up by other media outlets, sending the euro falling more than a cent against the dollar.”The authorities have been clear today. We agree. There is no reason to think that IMF financing will be needed,” an IMF spokesman said in a statement.

Unfortunately, this article in the Financial Times quickly undid all the calming effects of eight hours solid sleep.

Irish credit default swaps, which measure the market’s view of the probability a country will default on its sovereign debt, jumped close to record highs before Dublin’s denial. The government calculates that, if it sticks to the pay deal agreed with unions in September, the deficit will rise from 6.5 per cent of gross domestic product in 2008 to 10.5 per cent this year, and remain at 11-12 per cent up until 2013…….The Irish government, in a submission to the European Commission last week, said it was aiming to bring the deficit to less than 3 per cent in 2013.

And of course Ireland’s is far from being one of the worst case situations here. The rumpus we are witnessing seems to have been caused by a veiled threat – strongly denied – from Brian Cowen that if unions failed to agree to a proposed 5% cut in public sector salaries there would be no alternative to calling in the IMF. Come on everyone, tidy up the living room, daddy will soon be home from work!

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

5 thoughts on “Ireland Won’t Be Going To The IMF

  1. The IMF thing seems to be a case of an off-hand remark quickly getting out of hand. It seemed bizarre from the start that the government would have raised the spectre of the IMF since there is zero prospect of a currency crisis and the level of debt is extremely low; furthermore the debt management agency is sitting on a huge cash reserve (raised from commercial paper issuance, which it has no problem doing), so even with the rising spread over bunds there is little rollover risk. Instead it was a trade union leader extrapolating from the situation and trying to send a message to workers — which raises a socio-economic question about which “side” trade union leaders are on. Recent Irish history provides indications that the union leadership has been co-opted by the government.

  2. Hi,

    “The IMF thing seems to be a case of an off-hand remark quickly getting out of hand.”

    This is surely true, but don’t underestimate the underlying problem. People really don’t like systematic wage cuts, and certainly not ones that may extend over several years.

    Basically there are two, and only two, ways to handle a problem on the scale Ireland has one in macro economic terms: either a huge devaluation to restore competitiveness, or a massive correction in relative wages and prices. Since Ireland doesn’t have its own currency to devalue (surely the least painful way – look at the UK) then there only is the second option. But this isn’t easy. Basically, the big problem with implementing internal wage deflation is that people tend not to like it, and again the population put pressure on the politicians. Dominique Straus Kahn had to fly personally into Budapest this week to stop the politicians back tracking on the public sector wage cuts they were committed to. As we have been seeing in the newspapers these policies have not beenproving too popular in Latvia, and so we go on.

    The difficulty is that this is simply a process that feeds on itself, since as wages and living standards fall, then so does domestic demand, and if everyone’s domestic demand is falling, where does the “recovery” come from. That was why the 1930 to 1933 thing was so slow in turning round.

    Well, it would have been not to have gotten here in the first place, but we are, so I reckon the main thing is to look reality straight in the face, not flinch, and get on with it.

    But since politicians are dependent on their voters they find the “getting on with it” part
    to be the difficult bit, and hence you need the IMF “bad cop” – I mean you can even blame the US if you get desperate here, due to the level of influence they have on the fund. Someone has to be the “whipping boy”, and I don’t see the EU Commission offering to play the part, if the history of the Stability and Growth Pact is anything to go by.

    Now, the big question is, if everyone is going all together for exports, who will be in a position to buy all the imports?

    Well remember, two thirds of humanity currently live in povery, and are hoplessly “under-leveraged” so bring up living standards in much of the world can create a huge market. Basically we need something like the post WWI Marshall Plan (which was for Europe), but I guess we probably won’t even get round to talking about this till say 2011, when people finally come out of denial and recognise we need to have some major concerted initiative.

    First they will try – as we are seeing – internal fiscal stimulus, but you can’t restart a car when the engine crankshaft is simply broken – ie we don’t have here what Krugman likes to call simply “magneto” problems. The issue is larger and structural.

    Basically Japan, Germany and the US can sell producer goods to developing economies, while places like Spain, Italy, Hungary etc can sell consumer durables to the US, Japan and Germany, if you want some sort of simple blueprint, but the devil here really will be in the details, and what I am offering are only loose thoughts, and not yet a worked out proposal.

    Maybe this will come, but from someone with rather more resources than I personally have to hand (the G8???).

  3. Pingback: The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation | afem | A Few Euros More | More European Opinion

  4. I have alot of money , less than 50,000 pounds in a bond with the Post Office.It is due to mature in 6 months.Given the uncertainty with the Irish banks and speculation about possible default by the Irish government due to the weakening economy.Should i forgo my significant interest on my savings and transfer it to a UK based bank covered by the FSA compensation scheme.

  5. Pingback: The (Credit) Drought In Spain Falls Mainly On The Plane | afoe | A Fistful of Euros | European Opinion

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