Ireland's future depends on breaking free from bailout. His analysis of the economic problems besetting Ireland is fundamentally sound. However some of his prescriptions leave much to be desired.
He states:
National survival requires that Ireland walk away from the bailout. This in turn requires the Government to do two things: disengage from the banks, and bring its budget into balance immediately..So as part of his solution to our economic problems he is suggesting that
government should eradicate the budget deficit of €18.5 billion at the stroke of a pen? This suggestion is both impractical and nonsensical.It would be impossible to attain this target in the short term.
Unemployment would hit one million within a few weeks as the economy collapsed. Several hundred thousand people would default on their mortgages. Thousands on social welfare would would go without.
All grand in theory. Sadly not practical. No economy could survive a shock of those proportions. The economy is barely turning over at present after Brian Lenihan’s last budget. Try bringing in a budget 3 or 4 times more severe than the last and visualise the impact. Interestingly the national media has failed to pick up on Morgan Kellys 19 billion euro deficit proposal. This is part of the soft underbelly of the Kelly plan. His proposal is thus fatally holed under the water. There is a tendency in the media to assume that because Professor Kelly forecast the economic crash, that his economic prescriptions hold water. In fact they are deeply flawed.
Professor Kelly has failed to spell out how he would cut the deficit by €18.5 billion at the stroke of a pen. Can we have a media discussion of this proposal please? He has failed to outline IN DETAIL the consequences for the economy of such a decision.
His proposals on disengagement from the banks are fraught with difficulties and could lead to a total collapse.
He is of course correct to state that by 2014 the national debt will become unsustainable unless the EU changes its attitude to Ireland.
The EU will eventually be forced by the economic realities to restructure the bank element of the sovereign debt. This must be cut by 30% and the repayment period lengthened to 25 years with EU APPROVAL. The government must increase its efforts to bring this about.
Kelly has not got the answer. He is correct in his analysis of the problem. However his "solution" is even worse than the appalling bailout. He argues that we can just walk away from the bailout. What would fund services?
So in summary he argues that
- we should wipe out the deficit of €18.5 billion in one fell swoop. This would wipe out all economic activity and is a stupid suggestion
- He further argues that we must walk away from the bailout. This would mean that the state could not fund health and education services and social welfare. He has of course given no indication of where alternative funding would come from.
We are all aware that the debt burden will become unsustainable. The difficulty is to engineer a workable solution.
Before the property crash Morgan Kelly was unfairly criticised for his analysis. He correctly forecast the property crash.
Now however the country has gone to the opposite extreme. Professor Kelly is now God. He can say or do no wrong. Well in this case he has not put forward a workable solution. It is time for people to use their critical faculties and wake up.
The Kelly Kamikaze approach would finally polish off the patient.
Link to Irish Times article: Ireland's future depends on breaking free from bailout
3 comments:
Interesting article. What is your own take on what Ireland should do that would be the most painless for the banks, country and citizens.
The last Irish government bailed out the banks and guaranteed all their liabilities (a wrong decision). This resulted in bank debts being added to Irelands national debt and thus becoming sovereign debt. In addition Ireland is running a budget deficit of 19 billion euro (27 billion US dollars.
If Ireland now defaulted on the banks debts it would be seen as defaulting on part of the national debt.
Irelands national debt could reach 250 billion euro by 2014 as a result of the bank guarantee. That is unsustainable in my view.
The EU needs to restructure the bank element of the sovereign debt. This must be cut by 30% and the repayment period lengthened to 25 years at very low interest rates. In short the bank bondholders must take a hit. If this is done the national debt becomes sustainable and confidence returns to the economy.
There is a huge volume of savings in Ireland because people are afraid to spend due to economic uncertainty.
A resolution of the debt crisis will result in massive consumer spending in the as confidence returns. So tax receipts increase massively thereby closing the budget deficit quickly.
The Morgan Kelly article has done more damage to consumer confidence.
His suggestion to slash and tax away 19 billion euro in one budget is economic lunacy. It would wreck the economy. In addition Ireland is being kept afloat with IMF/EU loans. Professor Kelly suggests that Ireland should ditch those loans. What would pay for social benefits and the public service if that happened? He has provided no answer.
He wishes to repudiate bank debt. Unfortunately this would now be seen as a default on sovereign debt (government debt) because the last government guaranteed banks liabilities.
If Ireland were to do this the country would be seen as an outcast on the bond markets and would be unable to borrow as lenders would believe that they would not be repaid. At present Ireland cannot borrow on the bond markets because lenders are demanding too high an interest rate. Its borrowing is now funded by the IMF/EU. In addition the European Central Bank is pumping liquidity into Irish banks because there has been an outflow of deposits.
Professor Kelly is now seen as a God in Ireland just because he forecast the crash. You dare not question any suggestions that he makes. Well I am questioning his half baked approach. It is economic lunacy.
it is time for the Irish media to wake up and actually analyse what he is saying. Incidentally he does not explain how he would eradicate the 19 billion euro deficit in one fell swoop. There is no analysis from him of the consequences of a 30% pay cut in public servants pay and social welfare. He has not explained how the health and education services would be funded. In short he has no answer.
There is no analysis from him of the consequences of taking 19 billion euro out of the economy in one go. His suggestion is crazy.
you ask how to pay for public services?
the answer to your question is relatively easy -the Irish leave the Euro, a flawed financial instrument & return to their own currency which is unified with fiscal policy
everyone else is fed up with bailing the speculators of our society out. people who do a useful job will never be out of work
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