John FitzGerald, ESRI
In the current crisis, what makes Ireland very different from Spain, Greece and Portugal is our forecast balance of payment surplus – the people of Ireland are collectively net repaying foreign debt. With further tough fiscal action on the way and depressed consumers, the surplus will inevitably increase, as will the related repayment of debt. There are few examples in recent history of countries with balance of payments surpluses going bust; debt repayment and insolvency don't normally go together.
The current funding crisis in the euro area is very troubling. Fortunately, the National Treasury Management Agency has a big insulation of liquidity and Ireland can ride it out for quite some time. However, if the crisis is not sorted out soon, the negative effect on euro area growth will be damaging for the Irish economy. Hence a resolution is urgent for all our sakes.
The problems in the banking sector have become clearer in recent months, as outlined in the latest ESRI Quarterly Economic Commentary. The governor of the Central Bank has recently suggested that, with the exception of Anglo-Irish and Irish Nationwide, the other Irish banks are likely to still have some residual shareholder funds, even taking account of their huge losses. As a result, they are not insolvent but rather undercapitalised.
Anglo-Irish and Irish Nationwide together are the albatross around the neck of the economy. The minister for finance has already indicated that they could end up costing the taxpayer €25bn. Everything needs to be done to reduce the taxpayers' exposure in this area. However, it is clear that, while the taxpayer will end up losing a lot because of these rogue institutions, even allowing for the ensuing interest cost, Ireland should still move into a balance of payments surplus. This provides reassurance as to the overall financial sustainability of the economy.
Alan McQuaid, Chief economist, bloxham
There is no doubt that the Greek debt crisis has increased the chances of a default by, not only Greece, but other 'peripheral' eurozone countries like Portugal and Ireland. The general feeling in the financial markets is that Greece will end up defaulting at some point over the next three years.
However, the key question is whether or not Ireland will end up defaulting too? Morgan Kelly paints a very bleak picture, though he is right to say it will be the banking sector that forces Ireland into default if that is how things pan out in the end.
The reality is that nobody really knows what the end financial cost to the state will be from the banking crisis. But one has to assume new Central Bank governor Patrick Honohan and Financial Regulator Mathew Elderfield have looked at the banks closely and done their sums. They believe the cost to the exchequer won't be anywhere near as large as Kelly makes out and, while high, will be 'manageable'. I'm inclined to give them the benefit of the doubt.
Although the idea of defaulting on our debt may seem appealing, going down that route could do more damage than good in the long-run.
A lot will depend on how things play out for the Irish economy. As a highly open economy, we are dependent on a global recovery, but are in a better position than most because we export more to non-eurozone economies, particularly the US.
The economic outlook for Ireland is still uncertain, though I'm more optimistic now than at the start of the year. I believe, if the government can continue to deliver on fiscal austerity measures, there is every chance we will get through this crisis with our economic integrity and reputation intact.
Anthony Foley, Dublin City University
I do not expect the Irish economy to go bust and default on sovereign debt. However, I agree with Morgan Kelly's basic analysis that we face a very difficult situation and that 'going bust', or 'doing a Greece', is still a very real possibility.
The economic and financial situation is worse than presented by current government statements and statistics. The public financial projections presented with the December 2009 Budget – which outlines our path towards the 3% borrowing requirement by 2014 – do not include the impact of the interest payments on the money borrowed for the bailout of Anglo Irish Bank.
'Special arrangements' are already in place to support the Irish financial situation such as the cheap money being made available by the ECB to finance Nama's purchase of bank loans. Already, we have bypassed market availability of funds and have not included this borrowing in the government accounts. The ECB is also providing ongoing liquidity to the Irish banking sector.
The banks will suffer further losses from the 'ordinary' loans and mortgages.
It is often forgotten that the government's financial strategy, involving ongoing cutbacks for the next several years, already includes the expectation of a resumption of reasonable economic growth in 2011 to 2014, with the consequent boost to tax revenue. Alternative estimates to Morgan's still result in a large future debt burden. This will be supportable with continuing large and widespread reductions in public expenditure and higher taxes. It would be preferable if bondholders and bank shareholders picked up more or part of the tab, but I am not convinced that socking it to bondholders would have the limited negative impact expected by Morgan.
Overall, I think Morgan's analysis is more realistic than the 'worst is over' school, but I do not expect us to go bust.
Dr Aidan Kane, NUI Galway
I don't think explicit sovereign default is inevitable. First, we still have some policy choices left. Prof Kelly himself suggests a debt-for-equity swap, which might credibly and more equitably allocate banking system losses. The very scale of the risks now posed to the state might force such previously unthinkable policy responses and reversals, short of default. I think there's a deep institutional commitment (right or wrong) to avoiding explicit sovereign default, which might prompt a final solution for selected bank creditors.
In the meantime, and less happily perhaps, I think the state will continue to try to manage (or burn through) cash balances in the hope that time itself will deliver a return to credit-market normality for banks and governments. That could be a vain tactic, given the unfolding eurozone crises, but I think we're too early into all that to say the game is up. If that storm gathers pace and breaks all over us, I could imagine the ECB and eurozone governments opting for implicit default – by allowing the debt to be inflated away, for example by effectively printing money – sooner than an explicit walking away from sovereign obligations.
On our domestic fiscal troubles in the medium term, I'd question whether a debt-service burden which pre-empts a large share of tax revenue would necessarily lead to a widespread political imperative to default. I think the record is of an Irish state which historically eventually fritters away any fiscal breathing space it has on regressive transfers, favours for insiders and vanity projects. Optimally, vigilant citizens, wise governments, and the rule of law would check those impulses. Back here in Ireland, and somewhat less than optimally, a big debt burden and mobile tax bases will severely constrain the Irish state's role in the economy for a decade or so. That outcome may prove surprisingly more economically palatable than the alternative and vulgar drama of state bankruptcy.
Jim Power, Chief economist, Friends first
The response of government and the Department of Finance to Morgan Kelly's cataclysmic take on Ireland's economic prospects has been less than convincing – I would be more inclined to describe it as pathetic. There is nothing new there, as the department effectively tried to have me sacked 15 months ago for daring to suggest that Ireland could be facing a serious debt crisis. The powers that be don't appear to welcome proper debate.
Kelly is spot-on in suggesting that GNP is the most relevant growth metric to look at in the context of Ireland. He suggests that Irish banks remain on track to lose up to €70bn, which translates into a bill for the taxpayer equivalent to more than 30% of GDP. There may be some element of double counting at play here, but such a figure is certainly possible.
The problem is that we still don't understand the nature of the non-Nama loans on bank balance sheets and if there is one thing we should learn from the crisis, it is not to believe anything that emanates from discredited bank management. The call for a special resolution to force bank creditors to swap €65bn of debt for equity after the original guarantee expires in September should be given careful consideration.
Whether one agrees or disagrees with Morgan Kelly's assessment, he has to be taken very seriously and given great respect, quite simply because he got it so right and most others got it so wrong over the past three years. I am more in agreement than disagreement with his view of the world. If the Irish economy grows strongly over the next couple of years he could be proven overly pessimistic, if growth does not resume, he could be spot-on.
Marc Coleman, Economics Editor, Newstalk
If we look at hard metrics, rather than hype, Ireland's position looks a lot better than Morgan thinks. As he pointed out in his article, our public debt is – as a ratio of GDP – not significantly different from the EU average. His worry relates to our level of private-sector debt and certainly, on the face of it, it looks worrying.
But look more closely. Much – certainly not all – but much of our debt accumulation over the past decade was because we were growing not just economically but demographically. The average age of Irish citizen is amongst the youngest in the EU. Our birth rate is by far the highest. And no other EU country has seen its population rise by a staggering 28% since 1996.
When you adjust for this, our private-sector debt levels – especially compared to ageing economies like Germany and Italy – is significantly better than it looks. With the OECD predicting our economy will be growing faster than the euro area next year, with our international competitiveness improving by 10% in the last two years and with our balance of payments back in surplus and unemployment now predicted to fall below a quarter million next year, there are no problems in our economy that we cannot solve with the right political will. Provided growth returns, the banking situation can recover.
Too much opinion on our economy is coming from people with no grasp of facts, or of how the real world actually works. Worse, much of it seems designed to grab headlines. Morgan Kelly certainly deserves credit for prescient observations on our financial regulatory regime made during the boom. But his prediction that the economy will go bust is insufficiently grounded in fact or analysis to be taken seriously.