12/12/2011: Are debt repayments to be blamed for growth collapse?

Some of the paper have clearly reached a bizarre level of Keynesian paranoia. Behold one example - The Guardian today (link here) screaming "Debt repayment is driving the EU back to recession".

While I agree with the idea that EU (more like the Euro zone to be accurate - do note that, folks from the Guardian) is heading into another recession, I highly doubt the cause of this is 'debt repayment' (note that the tense suggests that it is currently ongoing repayment) fault. Here's why:

Table above, taken from the IMF WEO September 2011 database clearly shows that not a single euro area member state is currently repaying its debts.

And in fact, as the table below details, NOT A SINGLE euro area state will be repaying any of its debts until the earliest 2014, when Greece is expected to start paydowns on its debts (under very rosy assumptions, of course):

Interestingly, IMF expects that in 2015 and 2016 overall debt levels will continue rising in ALL member states except for Greece.

So, run by me again that headline from the Guardian?

What if? - When the IMF knocks on neighbours' doors

In light of the IMF rescue packages for Latvia, Iceland and Hungary, it is worth looking at the conditions imposed under these loan contracts. While Ireland has not requested IMF assistance, yet, as probability of such a request rises (due to the deepening mismatch between Exchequer receipts and outlays), what austerity measures can the Irish Government count on should our rescue be structured along the lines similar to the above three states?

In answering this question (table below), I use the following comparatives:
(1) Current and forecast GDP and GDP per capita levels and growth rates;
(2) 2008 and 2009 budget deficits; and
(3) Relative extent of committed liabilities under various national rescue plans.

The estimates are presented under two scenarios for Ireland:

• 'Benign' scenario implying IMF/external funding of 10% of the 2008 GDP which will cover ca 30% of committed state liabilities for 2009; and
• 'Average' scenario consistent with 25% of GDP borrowing covering ca 75% of liabilities).

A third scenario - consistent with relative liabilities in line with those in Iceland would imply an improbable, but not an impossible demand for external funding of up to 58% of GDP. To err on the conservative side, I omit this scenario in the current post.

Finally, it is worth noting that I do not 'price-in'

• the effect of deeper economic contraction in Ireland than in some of the reference countries;
  
• the effects of higher public spending as a share of the domestic economy in this country relative to the reference countries; and
• factors relating to inflation differentials and currency adjustments (note that all countries in receipt of IMF loans have had significant currency devaluations, while Ireland had a significant currency appreciation).

Thus, these estimates should be viewed as lower bounds.


To date, the only sign of any 'austerity' measures coming from the Department of Finance is a vague rumor that Brian Cowen is looking for a 5% wage bill cut in the public sector. Whether or not this figure is gross of the wage increases granted in the latest Partnership agreement is a moot point, given the austerity measures of 15-20% estimated above.