With some delay, this is my article for Sunday Times April 15, 2012 - an unedited version, as usual.
Since 2008, judging
by a number of parameters and metrics, Ireland has been firmly in the grip of a
historically unprecedented financial, fiscal, banking and economic crises. This
is the consensus that emerges from book, titled What if Ireland Defaults? published by Orpen Press last week and
edited by myself, Professor Brian Lucey and Dr. Charles Larkin (here is the link to Amazon page for the book and for ebook version). The book brings
together views on sovereign and other forms of default by twenty two academic,
media, political and social policy thinkers is designed to re-start the debate
about the future trajectory of the Irish economy saddled with unprecedented
levels of public and private debt. Coincidentally, What if Ireland Defaults? Was published in the same week as the IMF
Global Financial Stability Report that focuses on the issues of household debt
overhang. The IMF report too stresses the dangers of the excess debt levels
across the economy and provides strong argument in favor of a systemic
restructuring of private debt in countries like Ireland.
The roots of the
Irish debt problem are historical in their nature, not only in the magnitude of
the debt overhang involved, but also in terms of the correlated economic,
fiscal and financial crises that define our current economic environment.
First, the Irish
crisis has resulted in a deep and protracted contraction in the economy that is
unparalleled in the modern history of advanced economies. In current market
prices terms, and not taking into the account inflation, our national output is
down 24.2% on pre-crisis peak, having fallen to 2003 levels. Investment in the
economy is down 59.6%. These rates of decline are so far in excess of what has
been experienced in Greece and are ten-fold deeper than those experienced in an
average cyclical recession.
The duration of
the Irish crisis is also outside the historical records. Since Q1 2008, Irish
economy recorded fourteen quarters of nominal contraction in GNP and thirteen
quarters of contraction in GDP. In effect, the economic crisis has already
erased 8 years of growth. At an average nominal rate of growth of 4% per annum,
it will take Ireland fifteen years to regain domestic output levels comparable
to 2007. And this is without accounting for inflation.
Second, Ireland
is now a worldwide record holder when it comes to the cost of dealing with the
banking sector crisis. Combined weight of banking sector capital injections,
and Nama is now close to 80% of our GNP. Irish Exchequer exposure to the
Central Bank of Ireland ELA and the ECB borrowings by the state-owned banks
lifts this number well beyond 200% of the national output. No advanced economy has
ever experienced such a massive collapse of the domestic banking sector.
Another unique
feature of Irish crises is their inter-connected nature. Economic recession –
driven originally by the external demand contraction and debt overhang in the
domestic economy was further compounded by the asset bust which itself is of a
historic proportions. To-date, Irish property markets are down 49.3% on
pre-crisis levels and the decline continues unabated. Large numbers of 30-50
year old families – the most economically-productive cohorts of our population
– are now deeply in negative equity and are increasingly unable to sustain debt
servicing. Officially, over 14% of our entire mortgages are currently either in
a default, officially non-performing or short-term restructured.
The property
bubble collapse, twinned with the debt crisis, didn’t just undermine the
banking sector and cut into household wealth. The two have also left Irish
economy without a growth driver that fuelled it since 2001-2002 when the
property and lending bubble replaced the dot.com bubble implosion. Put
differently, we are witnessing a structural economic recession. Since
1998-1999, Irish economy has lived through one bubble into another. Currently,
excessive indebtedness and lack of a functional financial system are leaving
Ireland without even a chance of finding a new growth catalyst.
In these
conditions, the most significant problem we face today is the debt crisis. Our
combined real economic debt – the debts of households, non-financial
corporations and the Government – relative to our GNP is the highest in the
advanced world. And, unlike our closest competitor for this dubious distinction,
Japan, we have no means for controlling the interest rates at which our economy
will have to finance Government and private sector debts.
It is the
totality of the real economic debts, not just the debt of the Irish Government,
that concern those economists who are still capable of facing the economic
reality of our collapse. This point is referenced in the What if Ireland Defaults? by a number of authors, and as of this
week, their views are being supported by the IMF, the Bank for International
Settlements and a growing number of academic economists internationally.
Frustratingly, at
home, our views are seen as contrarian, alarmist, and even populist. As the
crisis has proven, year after year, the official Ireland Inc is simply
unequipped to deal with reality.
Majority of
Irish economic analysts incessantly drone about the threats arising from the
Exchequer debts. Some, occasionally, add to this the banking debts. Fewer, yet,
might reference the households. None, save for a handful of usually marginalized
by the establishment economists, bother to treat the entire debt pile carried
by our economy as a singular threat.
The silence
about Ireland’s total debt, and the ongoing denial of the long-term disastrous
economic and social costs of the total debt overhang are the frustrating
features of our current state of the nation. It is this frustration, alongside
the realization that Ireland can be blindly stumbling toward a renewed debt
crisis, that informed myself and two of my co-editors to re-launch the debate
about the potential inevitability and consequences of debt restructuring.
To re-start this
debate, What if Ireland Defaults presents
a range of views on the current Irish situation, from the basis of sovereign,
banking debt and household debt restructuring.
The very idea of
what constitutes a default is a complex one. In the book we interchangeably use
the term ‘default’ as denoting a restructuring of the debt to reduce the
overall level of debt. This can be accomplished by reducing the debt level
itself, restructuring interest payments, extending the maturity of debt, or any
combination of the above. In addition, a default can take place in an relatively
orderly and coordinated fashion, as for example in Greece, or as a disorderly,
unilateral action, as in the case of Russia in 1998. Lastly, default can be pre-announced,
as in the case of Iceland, or unannounced – as in the case of Argentina. All of
these differences are reflected in the chapters of the book dealing with
historical experiences relating to sovereign defaults.
In the case of
Ireland, there is a broad consensus within the book that a sovereign default is
neither desirable nor inevitable. In other words, no author sees the situation
where Irish Government debt will have to be restructured unilaterally, without
prior cooperation with the EU authorities via the ESM or a similar collective
structure. However, substantive disagreements do arise among the authors as to
whether Ireland will require a structured default on banking and household
debts. In this context, some of the contributions to the book pre-date and
preclude the research on the necessity of household debt restructuring
published by the IMF this week.
The overriding
sense from What if Ireland defaults?
is of an economy on a knife edge. Given favourable economic circumstances,
especially in regard to our exports, a positive change in EU’s political attitudes
with regard to the legacy bank debt, and the return of domestic economic
growth, the debt levels which Ireland now faces can become sustainable, in that
a default on either private or public debts is not probable. However, we cannot
consider these developments as guaranteed, and in their absence, restructuring
of debts may become inevitable.
In short, both
the IMF report this week and the wide range of contributors to What if Ireland Defaults? are in a broad
agreement: Ireland should be putting forward systemic policy measures to
restructure household (and by a corollary, banking) sector debts. Absent such
measures, a combination of the long-term continued growth recession and debt
overhang, further compounded by the risks to interest rates and debt financing
costs in the medium term future will force us to face the possibility of a
sovereign debt default. Avoiding the latter outcome is more than worth the
effort of creating a systemic resolution to the household debt crisis.
CHART:
Sources:
Haver Analytics, National Central Banks, McKinsey Global Institute, NTMA and DÁIL
QUESTION NO 122, 14th September
2011, ref No: 23793/11
Box-out:
A
recently-published Cleantech Global Innovation Index 2012 shows the potential
for the development of the green-focused economies in Ireland. The study ranked
38 countries across 15 indicators that relate “to the creation and
commercialisation of cleantech start-ups, …measuring each [country] relative
potential to produce entrepreneurial start-up companies and commercialise
technology innovations over the next 10 years.” Overall, as expected, North
America and Northern Europe “emerge as the primary contributors to the development
of innovative cleantech companies, though the Asia Pacific region is following
closely behind.”
Ireland is ranked
ninth in the world in the cleantech league tables and scored strongly on
general innovation drivers (underpinned by the presence of innovation-intensive
sectors dominated by MNCs and some domestic exporters) and commercialised
cleantech innovation (also largely linked to MNCs and a handful of Irish
indigenous companies). We fall below average on cleantech-specific innovation
drivers, such as policies supporting innovation in energy and green-IT and
IT-for-Green. Ireland has only average scores for supportive government
policies and access to private finance, which is disappointing.
What the global
rankings, and the Irish experience clearly show is that globally there is an
extremely weak positive relationship between cleantech-specific innovation and
commercialized cleantech innovation. In Ireland this relationship is stronger
than average. This is most likely due to the more advanced MNCs and exporting
base in the Irish economy in general, whereby domestic innovation activities,
including those booked by the MNCs into Ireland for tax purposes, is aligned
with commercialization via exports.
