THE IRISH State will mark the 88th anniversary of its founding on December 6th. The following day, the budget for its 89th year will be announced. It will be the most important budget since this State came into existence because, in all likelihood, it will be the last “best chance” to pull back from the brink of external bailout.
The past two weeks have seen international investor confidence in Ireland drain away. Almost without exception, every day saw the number of sellers of Irish government bonds far exceed buyers. The effect of the large-scale sell-off of government debt was to push interest rates on State borrowings beyond those which Greece faced in the early months of the year when it was forced to the last resort of bailout. It is for this reason that Ireland is in the eye of the latest storm to blow up in Europe’s sovereign bond crisis. Illustrative of the seriousness of the situation, and how the effects are being felt far beyond our shores, was the focus on Ireland among G20 leaders at their biannual meeting this week in Seoul.
There are many reasons explaining the relentless ratcheting up of bond yields since the summer, even if it is impossible to disentangle the degree to which each individual reason accounts for the overall effect. Fresh revelations about the size of the budget adjustment and the cost of keeping the banking system standing have played no small role. The continued slide in property prices weakens the foundations of any recovery. The failure of the domestic economy to return to growth has further undermined belief in Ireland’s ability to work through its problems unaided. And the current political uncertainty can’t be helping all these matters.
Most recently, the insistence of the German chancellor, Angela Merkel, on driving forward plans to ensure that investors in the future bear the cost of their own poor decisions led many of those who still hold Irish government debt to ditch it. Ms Merkel is unquestionably correct in her view that bondholders, not taxpayers, must take losses when incurred and that structures must be put in place to ensure that this happens. But she was mistaken to place so much emphasis on it at a time of such financial fragility. Ireland has paid a high price.
Most fundamentally, the bursting of an enormous property bubble has caused grievous harm to the Irish economy. As that bubble inflated, bank regulators and the guardians of the public finances were asleep at the wheel. We are where we are now primarily because of what was not done before the crisis erupted, rather than as a result of actions and inactions since its eruption.
The effects of the crash pose enormous and urgent challenges. Those who say now that failure is inevitable are defeatists. Those who say that there are simple solutions are either fools or knaves. All choices facing this State and society are painful and their implementation will be protracted. But as long as there is a chance of avoiding the involuntary loss of sovereignty that resort to outside intervention involves, the only choice is to fight on. We are now in the last chance saloon.