11.27.10

Ireland, then and now

Posted in Economics, Financial Markets, General Musings, Politics and Policy at 6:17 pm

In 2007, Ireland ran a budget surplus of 0.051% of GDP.  That was the 5th straight annual budget surplus for Ireland.  In fact, from 1997-2007, Ireland ran an average 1.6% annual budget surplus.  Likewise, in 2007, Ireland’s total government debt was 25% of GDP.  This was not a country on the brink of a fiscal crisis.

Fast forward to the present.

Ireland is now running an annual budget deficit of around 32% of GDP and the national debt is 65.6% of GDP.

What happened?  Obviously the financial crisis led to a large falloff in tax revenue, along with an increase in countercyclical spending.  That’s not the main story, however.  What really happened is that Ireland experienced a banking crisis and the Irish government guaranteed its banks.  That is the prime driver behind the numbers and is the motivating factor behind the ongoing bailout talks.

Ireland is about to inflict an unconscionable amount of pain on its citizens through a combination of austerity programs while saddling them with an enormous amount of new debt in the form of the EU/IMF bailout.  Is this necessary?  This amounts to a naked transfer of wealth from ordinary Irish citizens to a handful of German, British, and French banks who are creditors of the failed Irish banks.  There’s no making the losses disappear, the only question is who realizes them.  It has been determined that the Irish government, and by extension, the citizens of Ireland, will realize the loss.  Why?  Why not the bondholders?

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