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How a Promise to Guarantee Bad Debts Came to Haunt Ireland

07.02.2011, VOA Economics Report, by .

On December first, Ireland’s Prime Minister Brian Cowen announced measures to cut the biggest budget deficit in Europe. He said: “Today we’ve come to announce a four-year plan, between now and two thousand fourteen. It’s to bring certainty for our people. It’s to ensure they have hope for the future.” The plan aims to cut spending and raise taxes by twenty billion dollars. These austerity measures are a step toward getting aid from the European Union and the International Monetary Fund. But Mr. Cowen’s government could fall before the next budget is passed. The government asked for help after weeks of saying it did not need any. The EU and the IMF are expected to provide about one hundred fifteen billion dollars — or about half of Ireland’s economy. Ireland got into trouble by guaranteeing the debts of its banks during the world financial crisis two years ago. That promise has now cost over sixty billion dollars. Roisin O’Sullivan is an economics professor at Smith College in Massachusetts and a former economist at the Central Bank of Ireland. She says all deposits were guaranteed. Investors who had bought bonds in the banks also received the government guarantee. She says Irish bankers and banking supervisors had too close of a relationship. Ireland was known as the “Celtic Tiger” in the nineteen nineties. Its educated, English-speaking workers and low taxes appealed to foreign companies. Its economy grew quickly.But foreign investment and low interest rates raised prices to levels that could not be supported. Bad property loans hit hard at Ireland’s main banks. Unemployment is over thirteen percent. Ireland’s bank bailout and government spending have expanded the deficit to more than thirty percent of gross domestic product. This is ten times the EU limit for a deficit in relation to the size of an economy, as measured by GDP.But John James at Pace University in New York State says there is little the European Union can do. Germany and France want to give the European Commission more power over national budgets. For now, rescues by the European Central Bank and other lenders are the only answer in a debt crisis. EU officials want to complete the Irish aid plan quickly. They want to be ready in case of more bad news from economies like Greece, Portugal and Spain. For VOA Special English I’m Alex Villarreal.

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