Future never more uncertain as we remain on debt knife-edge
Published 18/12/2010 | 05:00
ECONOMIC forecasting is an inexact science at the best of times. And these are the worst of times.
But as I commented on Thursday on the third-quarter growth figures, never has so much depended on such apparently small differences in the economy's performance.
That is because the country is on a debt knife-edge.
Yesterday's analysis from the IMF illustrates this with welcome clarity.
There are two big unknowns -- growth and the final cost of the bank rescue. The IMF's growth forecast is lower than the Government's, but even if the IMF is right, Ireland could still come through the debt crisis -- provided the bank costs do not escalate too much.
If the banks require only the €10bn currently planned, national debt would peak at 110pc of annual output (GDP) in 2013. That would be less than the debt of several other EU countries and should be more than manageable.
Should the banks require the whole €35bn now on standby, debt would peak at 125pc of GDP. Ireland had been able to carry that level of debt in the 1980s, but markets are much more hostile in the present crisis.
A figure in between might just be affordable. That is on the IMF assumption of a 10.5pc expansion in output over the period. Should the Government's more optimistic forecast of 13pc growth turn out to be correct, there is every chance that crisis can be averted.
Still, it is a bit odd that the EU and IMF would agree to lend Ireland money without agreeing on the growth forecasts. The suspicion remains that the €15bn adjustment was seen as the most which was politically credible, so the growth forecasts had to fit.
One can see from the document why the EU and IMF might have agreed to that. It makes clear that Europe needs a rescue for Ireland just as much as Ireland does.
That comes back to the banks too. There is a near 70pc chance that "distress" in AIB and Bank of Ireland would cause similar distress in at least one other EU bank, it says.
It follows that, if Ireland fails to fix its finances, there will be further damage to the Irish economy from the consequences of that failure on other countries and banking systems.
That is what keeps Europe's leaders awake at night.
The future could hardly be more uncertain, but it is impossible to argue with the broad outlines of the programme agreed with the EU/IMF. Public spending must be cut, and then restrained for several years to come. New taxes have to be paid.
That remains the case whether the optimistic or pessimistic forecasts are correct. Most of that is beyond our control, but a concerted national effort will shade the odds a bit in the country's favour. Without such an effort, failure seems all but guaranteed.