Friday, 8 May 2009

The Banking Crisis and the Real Economy

Jim Stewart: Recent reported commentary in the media from the ESRI, drawing an analogy between Zimbabwe and Ireland is unhelpful in terms of analysing the current crisis in Ireland and developing solutions. The recent ESRI report (Spring 2009) in describing the impact of current policies in terms of rising unemployment, falling tax revenues, etc. is very valuable However, forecasting growth rates is in general a very inexact science. Even estimating past growth rates in the case of Ireland is problematic given the large impact of transfer pricing, and profit outflows from, multinational companies can have on measured GNP.

Other commentary within Ireland on the financial and economic crisis has also been exaggerated. Some examples:

1) Nationalising Anglo-Irish Bank would double the national debt. Wrong, because Anglo-Irish bank will be treated as a semi-state company whose debt is excluded in measuring Government debt for EU and other purposes;

2) The ratio of bank liabilities to GNP is 900%. Wrong, because bank liabilities of IFSC companies should be excluded. If excluded one estimate for this ratio is 309% of GDP (Davy Research Feb 17, 2009), but the total amount guaranteed by the State is 230% (€436 billion) of GDP (Annex I to supplementary Budget p. 17).

But more fundamentally some commentators are wrong in assuming certainty for what is uncertain. The overall impression is one of dogma rather than analysis.

1 comment:

Anonymous said...

Is Anglo not already nationalised?

In any case your assertion in point one relies on a technicality. While in may not affect the national debt as reported to the EU it is unlikely that the sovereign debt markets will be fooled by such hand waving. They will see it (quite correctly) for what it is - an increase in the debt obligations of the state - albeit one that is cushioned somewhat by also gaining some dodgy property assets.

In any case the effect will be to increase the return demanded by those who are going to loan us money and to bring us just a little closer to the day when the bond markets say 'no more' to Ireland Inc. Call it what you want; report it how you want but that will be the nett effect.