Welfare, pensions, salaries slashed if we quit bailout

[thedaras]

Ok, so to sum up, according to what Ive read on here;

We default and the cuts to soc wel,PS and pensions are so harsh that everything grinds to a halt.

We dont default, and we end up in the same situation but just take longer to get there??

Is there any hope ??

 

[Purple]

I think everyone wants to balance the budget Purple. The issue is how long you take to do it. Look at the effect that the gradual cuts are having on the economy. Growth prospects are very limited and that is by cutting about 5 billion from the economy each year. Now imagine cutting 20 billion in one go from the economy and imagine the impact on GDP. You would still have a deficit because the economy would be in the toilet and so revenues would have collapsed. You would also have social anarchy because you would have no functioning banking system, public services would probably grind to a halt and you would have huge social unrest.

The EU/IMF programme buys us time and allows us get our budget in shape before going to creditors and seeing what we can do about debt levels. We probably need to take larger bolder steps but there are consequences to everything.

I don’t accept the “no functioning banking system” argument; foreign banks would buy up the carcasses of AIB and BOI.
I do agree that we would have huge social unrest and many public services would grind to a halt but it is essential that we de-couple ourselves from debts run up by banking and if that means balancing the budget in 1-2 years then that’s what has to be done. While we are on a drip supplied by the guys we have to negotiate with they hold all the cards. As for the collapse in government revenue well as long our cuts in non-productive spending are chasing our shrinking economy we are in a downward spiral anyway.

 

[thedaras]

Purple,do you think that it will take just two years of severe cuts? If so, it would be worth it,if it means getting things back to some sort of normality..

 

[Sunny]

I don’t accept the “no functioning banking system” argument; foreign banks would buy up the carcasses of AIB and BOI.
I do agree that we would have huge social unrest and many public services would grind to a halt but it is essential that we de-couple ourselves from debts run up by banking and if that means balancing the budget in 1-2 years then that’s what has to be done. While we are on a drip supplied by the guys we have to negotiate with they hold all the cards. As for the collapse in government revenue well as long our cuts in non-productive spending are chasing our shrinking economy we are in a downward spiral anyway.

Nobody would buy bankrupt banks in a bankrupt Country.

 

[Purple]

My view on this is simple; we need to get to the bottom before we can start moving up again. The bottom is the bottom and no amount of borrowing or spin will change where it is. This is no different to the housing crash; we have to find the point at which the Irish economy will function without the stimulus of excessive private credit or state borrowing (which are in essence the same thing). Once we find that point we need to get our government spending at a level that our economy can sustain and only increase it as our economy grows.
What we are doing now is akin to building a wall of sand to stop the tide coming in.

 

[Purple]

Nobody would buy bankrupt banks in a bankrupt Country.

They wouldn’t be buying bankrupt banks, they’d be buying building s and employing the people who used to work in them. They’d then open up and sell their own products and services (since there would still be a demand for those products and services.

 

[Sunny]

They wouldn’t be buying bankrupt banks, they’d be buying building s and employing the people who used to work in them. They’d then open up and sell their own products and services (since there would still be a demand for those products and services.

And they would also be buying huge economic problems so would have no interest in lending into a bankrupt economy. They will buy deposit books no problem but they would not just come in and lend billions into a bankrupt economy. There would be no business loans, overdrafts, personal loans, credit cards etc etc.... I would love to meet the bank executive of one of Europe's largest banks who fancied explaining to their shareholders how they were expanding into Ireland. The Celtic Tiger story atttracted foreign banks. A bankrupt country doesn't.

 

[Shawady]

David Mc Williams on RTE radio this morning suggested that the government should issue 2 or 3 new banking licences.

 

[Sunny]

David Mc Williams on RTE radio this morning suggested that the government should issue 2 or 3 new banking licences.

To who? There are loads of foreign banks (some of largest in Europe and Canada and US) in the IFSC who hold bank licences and in theory could do a full banking business in Ireland. They aren't exactly rushing to do business.

 

[Purple]

Much of the scare-mongering about a collapse of the banking system is that we’d have no clearing banks; no way to process payments, transfer funds, access capital etc. No money in the ATM’s, no facility to pay staff etc. I don’t accept that. I agree that there wouldn’t be any credit flowing but if all the credit is borrowed money then it’s not much good to us anyway unless the net yield when invested is over 5 or 6%.

 

[Chris]

I don’t accept the “no functioning banking system” argument; foreign banks would buy up the carcasses of AIB and BOI.
I do agree that we would have huge social unrest and many public services would grind to a halt but it is essential that we de-couple ourselves from debts run up by banking and if that means balancing the budget in 1-2 years then that’s what has to be done. While we are on a drip supplied by the guys we have to negotiate with they hold all the cards. As for the collapse in government revenue well as long our cuts in non-productive spending are chasing our shrinking economy we are in a downward spiral anyway.

I agree on the "no functioning banking" point. As you mention in another post there would still be demand for banking services and such demands will be filled by some banks. Sunny points out that there would be no lending at all, which I do not buy into. While lending will still be restricted, this would be a good thing for a country that is so heavily indebted at public and private level. But viable businesses would be able to find credit, as there is always someone willing to lend at a certain rate.
What I do not buy into is the whole doomsday social unrest. There certainly would be unrest but I simply do not buy that this would amount to anything more serious than Iceland recently encountered.

Purple,do you think that it will take just two years of severe cuts? If so, it would be worth it,if it means getting things back to some sort of normality..

My opinion on this is that we need to cut spending by 40% over an 18 to 24 month period in order to balance the budget. The general objections to such a move have already been touched on in this and other threads, i.e. that it would damage the economy even more. But such a theory does not stand up to economic history. I have posted on several occasions about what happened in the US depression of 1920/21. President Harding did the following:
1) reduction in taxation especially the marginal rate
2) cut the federal budget in half in 2 years
The depression that started worse than the Great Depression was over in 18 months and some of the most prosperous years in US history followed.

Quite the opposite to the doom and gloom effect of cutting government spending happened. What this country needs is less spending and less taxation in order to make it a more attractive business environment. Do I believe this is going to happen? No.

 

[Chris]

To who? There are loads of foreign banks (some of largest in Europe and Canada and US) in the IFSC who hold bank licences and in theory could do a full banking business in Ireland. They aren't exactly rushing to do business.

The reason they are not rushing into business is because the cost of setting up a new branch banking network is prohibitive at present. This would be a totally different scenario if our bankrupt banks were liquidated offering a fast way for foreign banks to establish a branch network. Instead bankrupt organisations are being kept artificially alive making entry by new competition artificially more difficult that it should be.
It is government actions, once again, that are having a detrimental affect on the Irish banking system.

 

[DerKaiser]

So if we default we would not have access to the markets because we are not paying back the money they have already given us?

What about if we just default on the bank element of the debt?

This is the most important point for me.

We can just cut the banks loose and balance the books of the current account but then we have serious amounts of existing national debt repayments as well.

Say we generate €36bn in tax revenues and spend €54bn, we might need €10bn p.a. for the next 10 years to repay sovereign debt. So we'd actually be closer to halving social welfare, public sector wages and health and eductaion spending.

Now if we take this road, in my opinion, we're immediately going to face a draconian situation. We'll have 60 kids to a class with no decent eductaion in unheated buildings, people will die in their thousands of what were previously easily preventable deaths due to slashed health budgets, tens of thousands of people will be left homeless, practically every industry that is dependent on domestic spending will fail, unemployment will probably treble, we'll simply push ourselves into a vicious circle, need I go on?

By continuing on the road we're on, we're not really improving our lot but we can't be making it any worse.

The US and UK would have a similar problem if they faced up to their debts immediately. Even the Germans would be completely up the swanny if they were to face up to the fact that their pensions timebomb is imminently approaching.

All I'm saying is that on paper the whole western world appears screwed. My own theory is that the solution to this will come through inflating away debt or widespread defaults in the medium term.

You can't tax your way out of a recession, spend your way out of a recession or cut your way out of a recession. We do have to continue to borrow to give us time to balance the books without destroying the economy. Right now the EU/IMF is the only sensible choice.

There is nothing to be gained or salvaged by imposing immediate penury upon ourselves. Obviously we can't take the mick, we have to accept reductions in living standards, but we shouldn't force ourselves into 3rd world conditions while most of those around us are realistically in as bad a position

 

[Sunny]

My opinion on this is that we need to cut spending by 40% over an 18 to 24 month period in order to balance the budget. The general objections to such a move have already been touched on in this and other threads, i.e. that it would damage the economy even more. But such a theory does not stand up to economic history. I have posted on several occasions about what happened in the US depression of 1920/21. President Harding did the following:
1) reduction in taxation especially the marginal rate
2) cut the federal budget in half in 2 years
The depression that started worse than the Great Depression was over in 18 months and some of the most prosperous years in US history followed.

Quite the opposite to the doom and gloom effect of cutting government spending happened. What this country needs is less spending and less taxation in order to make it a more attractive business environment. Do I believe this is going to happen? No.

President Harding (not sure why we are going there) slashed military spending. He did not slash the general spending in one year to the extent that you are suggesting.

 

[thedaras]

Why do you believe it will not happen?
And can I ask you what you think will happen?

 

[csirl]

We have to think about what weapon we have at our disposal in forcing the EU to give us a better deal.

For example, what do you think would happen if we announced that we dont like Sarkozy/Merkel and blame them for us getting a bad deal, so we will default if either or both ever get reelected? Impact is unpredictable - could go for or against them in terms of support in their upcoming elections, but you can guarantee that it WILL have a huge impact on the outcome. Do the French and Germans want us to be the biggest influence in their election results? Would guarantee a reaction and a swift political solution.

 

[Purple]

For example, what do you think would happen if we announced that we dont like Sarkozy/Merkel and blame them for us getting a bad deal, so we will default if either or both ever get reelected?

I got a good laugh at that! and I agree with your general point.

 

[michaelm]

Joining the euro was a misadventure for Ireland. And the guarantee was the worst decision in the history of the State. We were shafted, by both our Government and the EU, in the EU/IMF deal. We should now be quietly printing Punts but denying such; the EU will then drastically improve the bailout terms and sanction a haircut on unsecured debt.

I can't help thinking that the ECB should just write off what it is owed by piigs countries and simply print that figure in new euros (in the USA & UK do they not call printing money 'quantitative easing'?), the problem would be fixed at a key stroke.

I much preferred the EEC, which was about ease of travel and trade, over the EU project which is about a United States of Europe by stealth.

 

[Purple]

As long as US treasury secretary Timothy Geithner can make a phone call which forces private banking debt on the Irish tax payer then we are not masters of our own destiny.

We need to be in a position to make our own decisions because our masters are not acting in our interest.

 

[Chris]

President Harding (not sure why we are going there) slashed military spending. He did not slash the general spending in one year to the extent that you are suggesting.

No he didn't. WWI and its related military spending ended 14 months before the depression of 1920 began. Military spending was still included in the 1919 Federal budget which was $18.9b. The 1920 budget shows that military spending had already been cut out when the federal budget was a mere $6.8b (source: http://www.usgovernmentspending.com/year1918_0.html#usgs302).
Harding further cut spending in March 1921 (2 1/2 years after the war had ended) ultimately reducing the federal budget by 50% in two years. These were cuts in general government spending, not war spending.

Why do you believe it will not happen?
And can I ask you what you think will happen?

Let me rephrase, I do not believe any politician will have the guts to stand up to the public and introduce the severe cuts in the short time frame needed, as this will guarantee not being elected again. The public always wants something for nothing and that is what politicians promise.
I think that eventually we will face a chaotic default with government accounts running dry and that cuts will then be forced in a disorderly way. Rather than send a positive signal of proactively getting the budget balanced, this scenario will send a really bad message to any international investors.

I can't help thinking that the ECB should just write off what it is owed by piigs countries and simply print that figure in new euros (in the USA & UK do they not call printing money 'quantitative easing'?), the problem would be fixed at a key stroke.

Problems don't get fixed by monetary inflation they end up kicked down the road and exaggerated.

I much preferred the EEC, which was about ease of travel and trade, over the EU project which is about a United States of Europe by stealth.

I fully agree with you, the EU project has morphed into a disgusting bureaucratic glob of waste, but I think that is probably a topic for another thread.