Honohan: austerity

What is the worst-case scenario for Ireland's finances? If yields on sovereign bonds begin climbing into the unfundable stratosphere this week, a bailout may simply become unavoidable.

A consensus is forming that Ireland would get a rescue package similar in proportion to Greece's €110bn emergency loan. The reported figures under discussion are in the €50bn-€80bn range, presumably with some stringent fiscal conditions.

As Central Bank governor Patrick Honohan pointed out last week, Ireland is already planning to implement the austerity measures that would attach to any bailout. Some market-watchers believe cuts will bleed the economy so badly that we won't recover quickly enough to pay back our borrowings.

A bailout on tougher terms than the Greeks got could be worse. Greece got 5% money from the European Financial Stability Fund – far cheaper than the 12% bond investors were demanding when the EU parachuted in last May. Other eurozone countries are paying for this in proportion to their share of aggregate GDP. Other eurozone countries are paying for this in proportion to their share of aggregate GDP. Ironically, Estimates of the price of the next bailout range from 6%-8%, which is not much better than we can get on the open market, theoretically.

But if a bailout is bad, not getting a bailout is worse.

Brussels was urging the Irish government to accept help last week, but Taoiseach Brian Cowen insisted we could stand on our own. The worst-case scenario is not that we get a bailout and surrender economic sovereignty; the disaster is not taking a bailout and having to live on the €33bn in taxes the government is still able to collect if we can't return to the bond markets next year. Instead of a €15bn adjustment in four years, we'd be dealing with a €20bn shock overnight.