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February 02, 2009

Comments

Tomaltach

Hi Michael,
Your contrast between our debt to GDP now and that in the 80s - which was way higher - is a valid reminder that we are not yet in a terrible place. But I think it's important to remember that if we don't correct the trajectory of our borrowing we could fairly quickly push up our debt to GDP ratio very steeply. But there are other things to take on board. This is not 1985. We are in a completely different global financial environment. The world has just experienced one of the biggest financial collapses in modern times. The financial markets are badly blocked up and big lenders very cautious. This means that Ireland would find it difficult (or at least very expensive) to continue increasing borrowing levels on a massive scale. That is why the talk about the international rating agencies is quite important. So basically, any argument to play down the seriousness of our deficit by comparison with the 80s needs to be heavily qualified.

I have a question about figures. We've heard a lot recently about the 55 million a day servicing our debt. That is way more than the few % of GDP you mention. Where is the discrepancy?

James

We've heard an awful lot about the growing spread between German and Irish sovereign debt, but does anyone know where our borrowing costs (i.e. bond yields) are compared to one or two years ago? The comparison with Germany is interesting but so is what has happened to our own bonds in absolute terms.

Michael Taft

Tomaltach - I would just point out that it was not me making that comparison with the 1980s, it was other commentators (e.g. Colm McCarthy). I just putting that comparison in perspective. As I stated, I would not get complacent about the trajectory of borrowing; indeed, I fear under a fiscally restrictive policy the trajectory, while not necessarily increasing, will persist with us for a long time because fiscal restriction will hamper our ability to come out of this crisis in good shape to exploit an upturn. The Government has projected that, even with the economy turning positive in 2010 (I rather doubt that), that our output gap (the gap between potential and actual growth) will still be a negative 8 percent by 2013. In other words, we won't be returning to trend, or normal growth, for a long time - with all the effects that will have on employment, incomes and public services.

As to the €55 million a day - that doesn't relate to servicing the debt; that relates to how much we borrow annually. It's a great little number that describes the situation in dramatic fashion - but doesn't tell us anything about what to do.

Regarding the point raised by yourself and James - that is a potential danger. I will be coming up with some numbers on that and the general issue of investor confidence in government bonds in a post in a few days.

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