Friday, December 18, 2009

Economics 18/12/2009: How fair is that Ireland-Greece comparison?

Our policymakers are quick to point out that Ireland has been unfairly treated by the bond markets, for its CDS and bonds spreads are moving in tandem with those of Greece.

The sop story usually flows along the following lines: “Ireland has a better starting position in terms of lower debt burden and it has taken the pain necessary – through three Budgets effecting significant cuts to spending and imposing new revenue raising measures. Greece, obviously, have not done so. Thus, our bonds spreads should be much closer to Germany than they are to Greece.”

An interesting, if somewhat lopsided proposition.

Here are some comparatives (do keep in mind that our real income is GNP which is now 20% below the GDP figure):
Note: No recap scenario refers to no recapitalization funding for banks post-Nama; Recap 50% scenario assumes that 50% of expected cost of recapitalization of banks post-Nama impacts in 2010.
* Severely unrealistic target.
** Ex-Nama.
*** Nama primary €59bn, higher number also factors in expected post-Nama recapitalization costs.

And consider a couple figures:
Data for all three is from IMF/World Bank/BIS database

So here we go. Is Ireland unfairly singled out to be put next to Greece? You decide, but remember, bond markets do not care about one’s starting position or about the current position – they care about the future positions. When a patient gets a massive stroke, the fact that he was jogging 5 miles a day before is neither here, nor there.

And on a good news front: here. We are saved! Escaping Nama will be just a quick 88-mph blast to the past away.


patrick1978 said...

18th December 2008 - 18th December 2009
One year old today Constantin.

TrueEconomics said...

Thanks, Patrick - I totally forgot! It is 1 year anniversary and, strangely enough, the issues raised a year back are still with us...