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Colm McCarthy School of Economics, University College Dublin.

Corporate Restructuring Summit, Dublin, September 27 th . 2012 The Fiscal Crisis, Public Spending and the Business Outlook. Colm McCarthy School of Economics, University College Dublin. The Current Position. In a joint EU/IMF lending programme

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Colm McCarthy School of Economics, University College Dublin.

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  1. Corporate Restructuring Summit, Dublin, September 27th. 2012 The Fiscal Crisis, Public Spending and the Business Outlook Colm McCarthy School of Economics, University College Dublin.

  2. The Current Position • In a joint EU/IMF lending programme • Banks and government unable to finance themselves in the markets • Sovereign bond yields still unaffordable • Meaningful market re-entry, planned for early 2013, is unlikely under the current programme. • Credit availability and cost hurting SMEs

  3. The Irish Economy is Volatile: Policy has been Pro-cyclical • This is the second macroeconomic crisis in a generation…… • …and more difficult than the 1980s crisis • There has been a record of boom and bust, and of pro-cyclical policies • But this crisis is structural, not cyclical

  4. Crisis worse than the 1980s • Banking system rescue has enormous Exchequer costs, at least 40% and possibly 50% of GDP • Competitiveness must be restored without devaluation… • After four years of fiscal consolidation, GGB still over 8% of GDP in 2012 • Sovereign credit markets still do not believe the programme…

  5. Projected Debt Ratios per EU Commission and IMF

  6. Is fiscal policy enough? • Without fiscal measures taken to date, GGB deficit would be approaching 20%. There has already been a big fiscal effort. • The bank debt is critical. The ECB resisted burden-sharing with unsecured bank bondholders. • The sustainable sovereign interest rate can hardly be much above 4%

  7. Weak Macro Prospects • Sharp decline in activity seems to be over but no sign of recovery. • EU and US recoveries are weak • Fiscal stance highly deflationary, credit availability weak • Over 2012 to 2015, real GDP growth could be modest and inflation low • Government forecasts are too rosy

  8. Costs of the Bank Bail-out • Have added hugely to sovereign debt • Unfair to sovereign debt holders • Anglo loan losses = 8.4 times its equity capital, Nationwide even worse • Yet unguaranteed bondholders are being paid • This weakens public support for fiscal tightening

  9. Policy Imperatives • Get the deficit down…. • Banks re-capitalised but still not lending? • Competitiveness needs to be restored • Ireland has taken a disproportionate share of the burden of the European banking crisis • The next few years will see higher taxes and more spending cuts in any plausible scenario

  10. The TUPs • Three Unwise Promises • Pre-election promises to leave income tax rates, public service pay rates and social welfare rates unchanged. • In Health, this means cuts outside the payroll bill, which is over 70% of the total. • The TUPs will probably be abandoned at some stage, why not soon?

  11. The Business Outlook • Both the recent IMF and Fiscal Council reports are saying the same thing • The programme is not really ‘on track’ • Without further fiscal measures, or debt relief, there could be a poor outcome • The climate for business, especially firms relying on the domestic market, will not be supportive for several more years.

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