9/3/2014: Financial Repression, Debt Crises & Debt Restructuring: R&R Strike Again

According to Reinhart and Rogoff recent (December 2013) paper "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten" (by Carmen M. Reinhart and Kenneth S. Rogoff, IMF Working Paper WP/13/266, December 2013 http://www.imf.org/external/pubs/ft/wp/2013/wp13266.pdf) many economies in the advanced world will require defaults, as well as drastic measures of Financial Repression, including savings taxes and higher inflation as debt levels reach a 200-year high.

You can read the entire paper, so I am just going to summarise some core points, albeit at length.


R&R open up with a statement that is more of a warning against our complacency than a claim of our arrogance: "Even after one of the most severe crises on record (in its fifth year as of 2012) in the advanced world, the received wisdom in policy circles clings to the notion that advanced, wealthy economies are completely different animals from their emerging market counterparts. Until 2007–08, the presumption was that they were not nearly as vulnerable to financial crises. When events disabused the world of that notion, the idea still persisted that if a financial crisis does occur, advanced countries are much better at managing the aftermath..."

This worldview is also not holding, according to R&R: "Even as the recovery consistently proved to be far weaker than most forecasters were expecting, policymakers continued to underestimate the depth and duration of the downturn."

The focal point of this delusional thinking is Europe, "…where the financial crisis transformed into sovereign debt crises in several countries, the current phase of the denial cycle is marked by an official policy approach predicated on the assumption that normal growth can be restored through a mix of austerity, forbearance, and growth."

The point is that European (and other advanced economies' policymakers are deceiving the public (and themselves), believing that they "…do not need to apply the standard toolkit used by emerging markets, including debt restructurings, higher inflation, capital controls, and significant financial repression. Advanced countries do not resort to such gimmicks, policymakers say. To do so would be to give up hard-earned credibility, thereby destabilizing expectations and throwing the economy into a vicious circle."

Note: per R&R "“Financial repression” includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and generally a tighter connection between government and banks. It often masks a subtle type of debt restructuring."

The warning that stems from the above is that "It is certainly true that policymakers need to manage public expectations. However, by consistently choosing instruments and calibrating responses based on overly optimistic medium-term scenarios, they risk ultimately losing credibility and destabilizing expectations rather than the reverse."

It is worth noting as a separate point in addition to the above issues that:

1. Financial repression in its traditional means (forcing public debt into investment portfolio of captive funds, such as pension funds, reducing real returns on savings, tax on savings, bail-ins of private investors etc) in the case of the advanced economies are running against demographic changes, such as ageing of these societies. Just as the economies reliance on savings and pensions rises, financial repression is cutting into the economies savings and pensions.
2. Higher inflation is associated with higher interest rates in the longer term, which can have a devastating impact on debt-burdened households. Hence, deleveraging of the sovereigns cuts against the objective of deleveraging the real economy (households and companies). This is most pronounced in the case of countries like Ireland.
3. Strong point from R&R on austerity. In many cases, advanced economies debate about austerity is 0:1 - either 'do austerity' or 'do expansionary fiscal policy'. This is superficial. Per R&R: "Although austerity in varying degrees is necessary, in many cases it is not sufficient to cope with the sheer magnitude of public and private debt overhangs."

So the key lessons from the past are as follows.

Lesson 1: "On prevention versus crisis management. We have done better at the latter than the former. It is doubtful that this will change as memories of the crisis fade and financial market participants and their regulators become complacent."

Figure 1. Varieties of Crises: World Aggregate, 1900–2010

A composite index of banking, currency, sovereign default, and inflation crises (BCDI), and stock market crashes (BCDI+stock) (weighted by their share of world income)


Lesson 2: "On diagnosing and understanding the scope and depth of the risks and magnitudes of the debt. What is public and what is private? Domestic and external debt are not created equal. And debt is usually MUCH bigger than what meets the eye."

R&R are not shying away from the bold statements (in my view - completely warranted): "The magnitude of the overall debt problem facing advanced economies today is difficult to overstate. The mix of an aging society, an expanding social welfare state, and stagnant population growth would be difficult in the best of circumstances. This burden has been significantly compounded by huge increases in government debt in the wake of the crisis, illustrated in Figure 2. …As the figure illustrates, the emerging markets actually deleveraged in the decade before the financial crisis, whereas advanced economies hit a peak not seen since the end of World War II. In fact, going back to 1800, the current level of central government debt in advanced economies is approaching a two-century high-water mark."

Figure 2. Gross Central Government Debt as a Percentage of GDP: Advanced and Emerging Market Economies, 1900–2011 (unweighted average)

Things are even worse when it comes to external debt, as Figure 3 illustrates.

Figure 3. Gross Total (Public plus Private) External Debt as a Percentage of GDP: 22 advanced and 25 Emerging Market Economies, 1970–2011

Note the 'exponential' trend on the chart above since the 1990s...

This is non-trivial (as per Figure 2 conclusions). "The distinction between external debt and domestic debt can be quite important. Domestic debt issued in domestic currency typically offers a far wider range of partial default options than does foreign currency–denominated external debt. Financial repression has already been mentioned; governments can stuff debt into local pension funds and insurance companies, forcing them through regulation to accept far lower rates of return than they might otherwise demand. But domestic debt can also be reduced through inflation."

And, as Figure 4 illustrates, public and external debts overhang are just the beginning of the troubles: "the explosion of private sector debt before the financial crisis. Unlike central government debt, for which the series are remarkably stationary over a two-century period, private sector debt shows a marked upward trend due to financial innovation and globalization, punctuated by volatility caused by periods of financial repression and financial liberalization."

Figure 4. Private Domestic Credit as a Percentage of GDP, 1950–2011 (22 Advanced and 28 Emerging Market Economies)

Lesson 3: "Crisis resolution. How different are advanced economies and emerging markets? Not as different as is widely believed."

R&R (2013) show "five ways to reduce large debt-to-GDP ratios (Box1). Most historical episodes have involved some combination of these."

As R&R note, "the first on the list is relatively rare and the rest are difficult and unpopular." But more ominously, "recent policy discussion has tended to forget options (3) and (5), arguing that advanced countries do not behave that way. In fact, option (5) was used extensively by advanced countries to deal with post–World War II debt (Reinhart and Sbrancia, 2011) and option (3) was common enough before World War II."

Beyond the fact that the two measures have precedent in modern history of the advanced economies, there is also the issue of the current crisis being of greater magnitude than previous ones.

"Given the magnitude of today’s debt and the likelihood of a sustained period of sub-par average growth, it is doubtful that fiscal austerity will be sufficient, even combined with financial repression. Rather, the size of the problem suggests that restructurings will be needed, particularly, for example, in the periphery of Europe, far beyond anything discussed in public to this point. Of course, mutualization of euro country debt effectively uses northern country taxpayer resources to bail out the periphery and reduces the need for restructuring. But the size of the overall problem is such that mutualization could potentially result in continuing slow growth or even recession in the core countries, magnifying their own already challenging sustainability problems for debt and old age benefit programs."


The authors conclude that "…if policymakers are fortunate, economic growth will provide a soft exit, reducing or eliminating the need for painful restructuring, repression, or inflation. But the evidence on debt overhangs is not heartening. Looking just at the public debt overhang, and not
taking into account old-age support programs, the picture is not encouraging. Reinhart, Reinhart, and Rogoff (2012) consider 26 episodes in which advanced country debt exceeded 90 percent of GDP, encompassing most or all of the episodes since World War II. (They tabulate the small number of cases in which the debt overhang lasted less than five years, but do not include these in their overhang calculations.) They find that debt overhang episodes averaged 1.2 percent lower growth than individual country averages for non-overhang periods. Moreover, the average duration of the overhang episodes is 23 years. Of course, there are many other factors that determine longer-term GDP growth, including especially the rate of productivity growth. But given that official public debt is only one piece of the larger debt overhang issue, it is clear that governments should be careful in their assumption that growth alone will be able to end the crisis. Instead, today’s advanced country governments may have to look increasingly to the approaches that have long been associated with emerging markets, and that advanced countries themselves once practiced not so long ago."


What R&R are showing in their paper is that Financial Repression already underway is hardly inconsistent with the potential for further restructuring and repression. They also show that the current crisis is still unresolved and ongoing and that the current de-acceleration in crisis dynamics is not necessarily a sign of sustained recovery: things are much longer term than 1-2 years of growth can correct for. In the mean time, as we know, the EU continues on the path of shifting more and more future crisis liabilities onto the shoulders of savers and investors, while offloading more and more public debt overhang costs onto the shoulders of taxpayers. All along, the media and our politicians keep talking down the risks of future bailouts, bail-ins and structural pain (lower growth rates, higher interest rates, higher rates of private insolvencies).


Note: You can read more on the rather lively debate about the effects of debt on growth by searching this blog for "Reinhart & Rogoff" Some of the links are here:

• 14/2/2014: Debt & Growth: New IMF Paper: http://trueeconomics.blogspot.ie/2014/02/1422014-debt-growth-new-imf-paper.html
• 31/12/2013: Debt and Growth: Consumption Crowding-Out Channel http://trueeconomics.blogspot.ie/2013/12/31122013-debt-and-growth-consumption.html
• 27/10/2013: Financial Repression, Economic Suppression & Budget 2014 http://trueeconomics.blogspot.ie/2013/10/27102013-financial-repression-economic.html
• 9/10/2013: Returning to Reinhart & Rogoff Debate http://trueeconomics.blogspot.ie/2013/10/9102013-returning-to-reinhart-rogoff.html
• 2/7/2013: Village June 2013: Real Effects of Government Debt Overhang? http://trueeconomics.blogspot.ie/2013/07/272013-village-june-2013-real-effects.html
• 17/6/2013: On Debt of the Nations & Euro Crisis: 2 links http://trueeconomics.blogspot.ie/2013/06/1762013-on-debt-of-nations-euro-crisis.html
• 10/10/2012: Irish Real Economic Debt - Busting Records http://trueeconomics.blogspot.ie/2012/10/10102012-irish-real-economic-debt.html
• 26/09/2011: Ireland's Debt Overhang - unprecedented, unmanageable & unsustainable http://trueeconomics.blogspot.ie/2011/09/26092011-irelands-debt-overhang.html

14/2/2014: Debt & Growth: New IMF Paper

An interesting working paper from the IMF, worth further digesting and blogging: "Debt and Growth: Is There a Magic Threshold?" by Andrea Pescatori, Damiano Sandri, and John Simon (IMF Working Paper WP/14/34, February 2014: http://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf)

Per abstract (emphasis is mine): "Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised."

"Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as 
countries with lower debt."

"Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility."

As I noted above: needs more reading and blogging. Generally, before dealing with the paper in details, this appears to contradict Reinhart & Rogoff (2010) paper and several subsequent papers (on slowdown in growth conclusions) and support a number of papers finding inconclusive evidence. Note another caveat: absence of evidence is not evidence of absence.

23/1/2014: A Troubled Recovery: Sunday Times, January 12

This is an unedited version of my Sunday Times column from January 12, 2014.


To some extent, the forward-looking data on the Irish economy coming out in recent months resemble the brilliant compositions of Richard Mosse – Ireland's leading artist at the venerable La Biennale di Venezia, 2013 (http://www.richardmosse.com/works/the-enclave/). Mosse show in Venice comprised sweeping photographic landscapes of war-affected Eastern Kongo rendered in crimson and pink hues of hope.

In our case, the rose-tinted hues of improving recent data are colouring in hope over the adversity of the Great Recession, now 6 years in the running. Beneath it all, however, the debt crisis is still running unabated.


This week, Purchasing Manager Indices (PMIs), published by Markit and Investec, signaled a booming Q4 2013 economy. Services PMIs averaged 59.7 over the last quarter of 2013, well above the zero-growth mark of 50. Alas, the Services PMI readings have been showing expansion in every quarter since Q1 2010, just as economy was going through a recession. The latest Manufacturing PMIs averaged 53.6 over the Q4 2013, implying two consecutive quarters of growth in the sector. Sadly, manufacturing activity, as reported by CSO was down substantially year on year through October. Things might have improved since then, but we will have to wait to see the actual evidence of this. Past history, however, suggests this is unlikely: PMIs posted nine months of growth in the sector over the twelve months through October 2013, CSO's indicator of actual activity in the sector printed seven monthly declines. Rosy forward outlook of PMIs is overlaying a rather bleak reality.

But the story of fabled economic growth is not limited to the PMIs alone. Property markets were up in 2013, boosted, allegedly, by the over-exuberance of international and domestic investors, and by the penned up demand from the cash-rich, jobs-holding homebuyers. No one is quite capable of explaining where these cash riches are coming from. Based on deposits figures, Irish property buyers are not taking much of cash out of the banks to fund purchases of South Dublin homes. They might be digging money out of the fields or chasing the proverbial leprechauns’ riches or doing something else in order to pump billions into the property markets. Still, residential property prices are up year on year. Alas, all of these gains are due to Dublin alone: in the capital, residential real estate prices rose 14.5 percent over the last 12 months. In the rest of the country they fell 0.5 percent.

Fuelled by rising rents (up 7.6 percent year on year) and property prices, the construction sector also swelled with the stories of a rebound. Not a week goes by without a report about some investment fund 'taking a bet on Ireland's recovery' by betting long on real estate loans or buildings, or buying into development land banks. Thus, Building and Construction sector activity in Q3 2013 has reached the levels of output comparable with those last seen in Q4 2010. Not that it was a year marked by robust activity either, but growth is growth, right? Not exactly. Stripping out Civil Engineering, building and construction activity in Ireland is currently lingering at the levels compatible with those seen in H2 2011. Worse, Residential Building activity was down year-on-year in Q3 2013. Meanwhile, in line with other PMI indicators, Construction PMI, published by Markit and Ulster Bank, suggests that the sector has been booming from September 2013 on. Again, more data is required to confirm this, but CSO's records for planning permissions show declines in activity across the sector.

The truth is that no matter how desperately we seek a confirmation of growth, the recovery to-date is removed from the real economy we inhabit. As the Q3 2013 national accounts amply illustrated, the domestic economy is still slipping. In the nine months of 2013, personal consumption of goods and services fell EUR734 million in real (inflation-adjusted) terms, while gross domestic capital formation (a proxy for investment) declined EUR381 million. Thus, final domestic demand - the amount spent in the domestic economy on purchases of current and capital goods and services - fell EUR1.3 billion or 1.4 percent. In Q2 2013 Irish Final Domestic Demand figure dipped below EUR30 billion mark for the first time since the comparable records began back in Q1 2008, while Q3 2013 reading was the third lowest Q3 on record.

Beyond Q3, the latest retail sales data for November 2013, released this week, was also poor. Even stripping out the motor trades, core retail sales were basically flat on 2012 levels in both volume and value.


With domestic economy de facto stagnant and under a constant risk of renewed decline, Ireland remains in the grip of the classic debt deflation crisis or a balancesheet recession.

The usual canary in the mine of such a crisis is credit supply. Per latest data from the Central Bank, volumes of loans outstanding in the private economy continued to fall through November 2013. Average levels of credit extended to households fell almost 4 percent in Q4 2013 compared to 2012 levels. Loans to non-financial corporations fell some 5 percent over the same period.

Total private sector deposits are up marginally y/y for Q4 2013, but household deposits are down. Thus, recent improvements in the health of Irish banks are down to retained profits and tax buffers being retained by the corporates. Put differently, the canary is still down, motionless at the bottom of the cage.

In this environment, last thing Ireland needs is re-acceleration in business and household costs inflation. Yet this acceleration is now an ongoing threat. Courtesy of the 'hidden' Budget 2014 measures Irish taxpayers and consumers are facing an increases in taxes and state charges of some EUR2,000 per household. Health insurance, water supplies, transport, energy, and a host of other price increases will hit the economy hard.

And after the Minister for Finance takes his share, the banks will be coming for more. The cost of credit in Ireland has been rising even prior to the banks levies passed in Budget 2014. In 3 months through October 2013, interest rates for new and existing loans to households and non-financial corporations were up on average some 19-23 basis points. Deposits rates were down 71 bps. Based on ECB latest statistics, the rate of credit cost inflation in Ireland is now running at up to ten times the euro area average.

In other words, we are bailing in savers and investors, while squeezing consumers and taxpayers.


These trends largely confirm the main argument advanced in the IMF research paper, authored by Karmen Reinhart and Kenneth Rogoff and published last December. The paper argues that in response to the global debt crisis, the massive wave of financial repression is now rising across advanced economies. The authors warn that economic growth alone may not be enough to deflate the debt pile accumulated by the Governments in the advanced economies prior to and during the current crisis. Instead, a number of economies, including are facing higher long-term inflation in the future, and lower savings and investment. The menu of traditional measures associated with dealing with the debt crises in the past, covering both advanced and developing economies experiences, includes also less benign policies, such as capital controls, direct deposits bail-ins, as well as higher taxes and charges.

Ireland is a good example of the above responses. Since 2011 we have witnessed pension funds levies and increases in savings and investment taxes. We also have witnessed state-controlled and taxed sectors pushing prices ever higher to increase the rate of Government revenue extraction. Budget 2014 banks levy is another example. Given the current state of banking services in Ireland, the entire burden of the levy is going to fall onto the shoulders of ordinary borrowers and depositors. Insurance sector was bailed-in, primarily via massive increases in the cost of health cover and reduced tax deductibility of health-related spending.

As Reinhart and Rogoff note, historically, debt crises tend to be associated with a significantly lower growth and are marked by long-run painful adjustments. The average debt crisis in the advanced economies since the WWII lasted 23 years – much longer than the fabled ‘lost decade’ on reads about in the Irish media.

All of which goes to the heart of the today’s growth dilemma in Ireland: while macroeconomic performance is improving, tangible growth anchored in domestic economy is still lacking. The good news i: foreign investors rarely look at the realities on the ground, beyond the macroeconomic headlines. The bad news is: majority us live in these realities.

Box-out: 

This column's mailbox greeted the arrival of 2014 with a litany of sales pitches from various funds managers. All were weighing heavily on ‘hard’ performance metrics, with boastful claims about 1- and 5-year returns. While appearing to be ‘hard’, these quotes present a misleading picture of the actual funds’ performance. The reason for this is simple: end of 2008 – beginning of 2009 represented a bottom of the markets collapse.

Over the last 10 years, annual returns to the S&P500 index averaged roughly 5 percent. This is less than one third of the 15.5 percent annualised returns for the index over the last 5 years. In Irish case, the comparatives are even more striking. Five-year annualised rise in ISEQ runs at around 12 percent. Meanwhile 10-year returns are negative at 1.2 percent.

Since no one likes quoting losses, the industry is only happy to see the dark days of the early 2009 falling into-line with the 5 year metric benchmark: the lower the depth of the depression past, the better the numbers look today.

The problem is that even the ten-year returns figures are often bogus. The quotes, based on index performance, usually ignore the fact that the very composition of the markets has changed significantly during the crisis. This is especially pronounced in the case of ISEQ. In recent years, ISE witnessed massive exits of larger companies from its listings. Destruction of banking and construction sector in Ireland compounded this trend. Put simply, investors should be we weary of the industry penchant for putting forward five-year returns quotes: too often, there's more wishful marketing in these numbers than reality.

27/10/2013: Financial Repression, Economic Suppression & Budget 2014

This is an unedited version of my Sunday Times article for October 20, 2013.


With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.

Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.

In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?

Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.

From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.

Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit.  Still, there is no tangible delivery on this.


However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.

The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.

The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.

And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.

Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.

On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.

The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.

The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.

We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.

In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.

History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.

Box-out:
The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.