Felix Salmon asks whether €90bn will be enough for Ireland. By his methodology, he is right to ask. He assumes the status quo will continue, and that the bail-out funds will be all that Ireland can access.
Ireland’s annual budget deficit is €19bn and this is a three-year plan, so that’s €57bn, he argues. Let’s call it €60bn. That leaves €30bn for the banks, by this thinking. The black hole in commercial real estate is valued at €20-25bn alone, he says. And that’s before we consider residential mortgages.
But this isn’t Argentina. Ireland is not defaulting on its debt: it is choosing not to raise money in the markets at punitive rates. There’s no reason why it couldn’t approach markets in June next year, when the state next needs to auction debt.
In addition to raising money in the markets, Ireland will be raising more in taxes and spending less. This is the purpose of the four-year austerity programme, an updated version of which will be released tomorrow. So the budget deficit – barring a mass exodus of taxpayers – should reduce year-on-year.
Listening to the interview with Ireland’s finance minister, one gets the feeling that the ratio of funds will be split the other way: less for the state and more for the banks (as a “contingency fund” that the state intends as a show of firepower). Don’t forget Dublin has been under a lot of pressure from eurozone colleagues to accept this money – the state is not insolvent.
Assuming the austerity programme continues on track, the main risk to Irish coffers now is continued outflows from its (mostly nationalised) banks. Depositors are needed. Perhaps some of the bail-out funds could be spent on a marketing programme pointing out that the banks have never been as safe as they are now. Or the government could extend its unlimited deposit guarantee, currently due to end in July of 2011 (when the European limit of €100k comes into force). Or the state could subsidise attractive interest rates for depositors.
The other risk is that the ECB will reduce its support for Irish banks as soon as funds are released. Brian Lenihan said yesterday that he expected the ECB to continue much as before, but this seemed more of a hope than a mutual understanding, and it is generally believed the ECB is keen to stop its support. If this happens, an immediate charm offensive on Irish depositors is all the more necessary.