Letter to TDs: Take Firm Action or We Default

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I have become so concerned about Ireland's looming economic and social crisis and the absence of any robust response by the Government that I wrote the message below to all TDs on 11th May.

I have highlighted my comments about GDP and GNP because:

  1. Almost uniquely within the EU, GNP is a much better measure of Ireland's economic activity and strength as it excludes profits of multi-nationals which are taken overseas.
  2. According to the ERSI's latest Quarterly Economic Commentary, the gap between GDP and GNP could widen from 22% to 27% by 2012. This makes the situation much worse than that portrayed in my message to TDs.
  3. The EU has today (13th May) indicated that Ireland's debt to GDP could reach 118% by 2012 - a year earlier than estimated the Government in its Jobs Initiative - May 2011.

This reinforces my belief that, unless rescued (rather than punished) by its EU partners, Ireland has no hope of avoiding involuntary default within the next few years with most serious consequences for the State and entire EU.

Here is the message sent to TDs:


I am very concerned that the Government may accept an offer from the EU/ECB for a 1% reduction in the bailout interest rate. This would be worth about €400 million a year - less that that being realised by the "raid" in pension funds. It falls well short of what is needed expect under the most optimistic growth assumptions and will effectively lock Ireland into a deal which is not sustainable.

To see what I mean, look at the Summary of Economic and Fiscal Outlook accompanying the Jobs Initiative. It indicates that General Government Debt will peak at 118% of GDP in 2013. If we rebase this to the much more appropriate GNP, the rate rises to 144% (based on GNP and GDP relationship for 2010 as per Quarterly National Accounts). Even if we inflate GNP to take account of corporation tax paid by multinationals on their profits, the rate hits 139%. This is completely off the scale and default is almost certain.

In "decision making under complete uncertainty" there is an approach called Mini-Max i.e minimise the maximum regret. In Ireland case, the maximum regret would be "why did we not do more to prevent default" and minimisation is blindingly obvious.

I would urge the Government to change its negotiating stance on the bailout by adopting a tough line with the EU/ECB/IMF and highlight the threat of MAD (Mutually Assured Destruction). This hangover from the East-West cold war is relevant as Ireland is fighting to retain its Sovereignty against the world's largest financial forces. If Ireland involuntarily defaults the resultant contagion will certainly undermine the euro and EU, and could progressively turn the world's economies into a nuclear wasteland. What parts of "disastrous" or "catastrophic" do the Irish Government, EU, ECB and IMF not understand in terms of their approach to Ireland's financial problems?

Any offer of a minor reduction in the interest rate should be rejected out of hand. Instead, the Government should demand a reduction in the bailout interest to a nominal rate (say, 1.5%), a payment reschedule spread over decades and an immediate write down of outstanding bank bonds by about 50%. In return, it must adhere rigidly to the bailout terms and agree for purely political reasons to a temporary levy of, say, 3% on top of the sacred corporate tax rate.

This is not a win-win solution but it is infinitely better than the lose-lose alternative.

For more on this, please see:

Thanks for your time and attention.


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This page contains a single entry by Brian published on May 13, 2011 1:08 PM.

Pension Levy Hits a Soft Target was the previous entry in this blog.

Approach to Bailout is a Disaster is the next entry in this blog.

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