There’s a “normal” path for a fiscal crisis.Â Some vulnerabilities build up.Â An external shock tips things over the edge.Â The country struggles along for a while but eventually refinancing or rollover risk forces the issue: new debt can’t be sold and the Impossible Missions Force is the only available lender.Â An ugly but usually effective correction takes place and eventually access to capital markets resumes.Â Of course there are exceptions but that’s the broad outline and some 2009 crisis countries may already over the worst.Â Then there’s Ireland.
Ireland is a much analyzed economy so there’s little value added in another in-depth analysis.Â So just a few simple facts.Â In April, a supplemental budget that was supposed to settle things for the rest of 2009 forecast a general government balance of -10.75 percent (of GDP) for 2009 and 2010.Â Assuming the same package of cuts as the April budget did, the respected Economic and Social Research Institute has just forecast deficits of close to 13 percent for 2009 and 2010.Â 2 percent of GDP went missing from revenue projections over a few months.Â To give credit where it’s due, the IMF never believed the government’s deficit forecasts even at the time they were formulated and forecast deficits of 12 percent in 2009 and 13 percent in 2010.
How big a deal is 2 percent of GDP?Â Well, the Irish government has told the European Commission that it will have the deficit down to the Maastricht level of 3 percent of GDP by 2013.Â Â Since the macroeconomic framework for Budget 2010 has already been set, that’s 3 budgets to achieve a fiscal adjustment of 10 percent of GDP, and formulated in the context of inability to reliably forecast tax revenue even 6 months ahead of time.Â Â And the new forecasts allow for a relatively benign global environment relative to the dire projections of earlier in the year, so this is specifically a crisis within the Irish Exchequer.
So what’s the attitude of the Irish government?Â They don’t seem too worried.Â The coalition government just sorted out some internal strains with a deal that constrains, not expands, its room for manoeuvre in the forthcoming budget.Â More importantly, the finance ministry points to the ease with which new debt can be sold and declining CDS spreads as evidence that the market foresees no crisis, therefore there is none.
But the comfortable debt funding only tells us one thing: that the market foresees financing.Â It doesn’t tell us who will do the financing.Â In particular, who wouldn’t blame the international bond market for concluding that when a middle to high income country with the European umbrella looks like it’s going under, enough multilaterals are rounded up until a package is found?Â Â Between the IMF, the EU, backdoor ECB mechanisms, and ad hoc regional consortia (such as for Latvia), large short-term deficits can be financed — in exchange for severe medium term correction measures.
Yet there is little sign that this contingency has been internalized in Irish political debate.Â Â There has been little public discussion of how the drift in the revenue base will be handled, the unions are outlining a leisurely schedule of days of action over the next few months, and it’s still 2 months to budget day.Â It’s all sustained by a highly divergent set of expectations about how the adjustment will come, but expectations which agree on one thing — it’s up to someone else to move first.Â It’s the classic game of chicken played at 10 miles an hour (or should that be 16 kph?).Â Eventually those cars still meet.