Related Posts Plugin for WordPress, Blogger...

Life and Times of an itinerant slacker in Sacramento. Thrills, Spills Galore coming soon. Not to mention lots of opinions.

Search This Blog

Friday, December 03, 2010

Why Many Irish People Don't Want a Bailout, in Plain English

I think it's hard to understand why so many Irish are opposed to their government accepting a bailout mostly funded by other European Governments.

I posted this on a forum. It got pretty good reviews soI thought I would repost here.

Reasoning Underlying the Popular Irish Aversion to a Bailout, in Plain English:

The bailout initiates a process in the "beneficiary's" economy, starting with a "triggering situation":

1) The Bond market demands yields that someone thinks are "too high" for the affected nation's debt. In this case, the German Government was the loudest complainer.

Now comes the bailout. Note who gets the support and who does not get it.

2) Bondholders receive some king of assurance (note - the bond markets as of yesterday do not appear to have attributed material value to the assurance given)

3) Given assurance, the cost of borrowing short term declines (maybe)

4) Bailout recipient nation cuts Government spending per conditions attached to bailout. Note, I haven't seen any publicly disclosed conditions. But this is inevitable.

5) Cut in Government spending = immediate shrinkage in economy=recession and dimmed prospects for future economic growth. This is where the trouble begins anew.

6) Growth stagnates (maybe, but likely (see Greece for example))

7) Cost of borrowing increases because the market determines the price of bonds to be a function of the capacity for a nation's future growth. Low or negative growth means bond purchaser sees little "organic" capacity to repay future debts. Therefore, the market demands higher yields. This adds to the original problem, which was that the bond markets were demanding high yields.

8) Now we are back to the first step,

9) Another bailout, or default.

Many Irish look to their north and see Iceland, where default was the chosen way out of a debt crisis. Iceland is showing signs of recovery. The Irish also look south to Greece, where the bailout has been executed and there is no improvement.

I am not sure I can make a clear comparison between Ireland, Greece and Iceland, since Iceland has its own currency, and it has been devalued.

The Euro makes everything more interesting.

That's my story and I'm sticking to it, or,
Sin é mo scéal agus tá mé ag cloí leis.

No comments:

About Me

My photo
I must enjoy shouting into a vacuum, but I think about getting my act together one of these days. My mom says I am very handsome and intelligent.
Play Super Chick Sisters!