Martin Wolf: credit market shutout

If Ireland doesn't soon start convincing international investors about its solvency and ability to reduce the budget deficit, the country runs the risk of becoming the "next Argentina'' and being shut out of world bond markets, one of Europe's best known economists has warned.

Martin Wolf, chief economics commentator with the Financial Times and former senior economist at the World Bank, said that Ireland's fiscal position was poor and deteriorating so fast it could find it impossible to borrow anymore.

"Ireland runs the risk of being shut out of world credit markets,'' said Wolf in an interview with the Sunday Tribune. "Ireland has to avoid becoming the next Argentina,'' he said. This was a reference to 2002 when Argentina defaulted on a large portion of its external debt. Since then it has experienced difficulty borrowing from global credit markets.

Ireland is heading towards a deficit, as a percentage of GDP, of at least 12% this year, four times that permitted under the EU's Stability and Growth Pact.

Wolf said Ireland needed to convince international investors of its ability to solve the deficit problem. He said the best solution to the crisis was to drive down nominal wages as this was the "best route to export led growth''. He said the government had made a number of "unfortunate decisions'', most prominently the bank guarantee scheme agreed in September 2008.

He said this scheme, while understandable at the time, had imposed an excessive cost on Irish taxpayers and creditors of failed banks should have been forced to absorb a larger portion of the losses.

Wolf last week spoke in Dublin at the International Financial Services Summit, sponsored by KPMG.

Wolf said the Ireland was a small open economy and simply did not have the national balance sheet to bail out all the institutions in trouble. He said a ``debt forgiveness'' programme would be needed in Ireland and the banks had effectively already been nationalised. "The state controls them, the shareholders have no skin in the game,'' he said.

Wolf is a forum fellow at the World Economic Forum in Davos, Switzerland and was a senior economist at the World Bank's international trade division for 10 years.

He was also a director of studies at the Trade Policy Research Centre, London and has advised governments and international organisations on trade and economic integration.