Monday, 8 November 2010


Before a tsunami is about to hit, first the tide goes out.

We're sunk: Ireland's top economist says bank losses make bankruptcy 'inevitable'

By Simon Duke
Last updated at 7:07 PM on 8th November 2010

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Grim prediction: Morgan Kelly, Professor of Economics at University College Dublin says Ireland's budget deficit is set to soar

Grim prediction: Morgan Kelly, Professor of Economics at University College Dublin says Ireland's budget deficit is set to soar

Ireland will be forced into national bankruptcy because of the soaring losses in its stricken banking system, the country’s leading economist has warned.

Professor Morgan Kelly predicted that Ireland would follow Greece in seeking a humilating bail-out from the European Union due to a £60.3billion (€70billion) blackhole in its financial system.

But Prof Kelly, an economics professor at University College, Dublin, believes that Brussels will force Dublin to pay such a high price that it will 'inevitably' default on its loans.

The EU wants to 'make an example' of Ireland so that debt-laden Spain and Italy won’t seek the ‘soft option’ of a EU rescue package, according to Prof Kelly.

'Our debt will rise faster than out means of servicing it and we will inevitably face a State bankruptcy that will destroy what few shreds of out international reputation that still remain,' he argued.

The grim prognosis came as EU Economic and Monetary Affairs Commissioner Olli Rehn started a two-day visit to Dublin ahead of the government’s forthcoming make-or-break budget.

Unless Irish finance minister Brian Lenihan can deliver a credible plan to slash a further €6billion from public spending, Ireland could be frozen when it next tries to raise loans in the New Year, economists fear.

That would leave Dublin without the means to pay for essential public services.

Prof Kelly, who is known as ‘Doctor Doom’ for his prescient prediction in 2006 that Irish house prices would collapse, believes that Mr Lenihan’s austerity measures will ultimately prove futile.

'What is the point of re-arranging the spending deckchair when the iceberg of bank losses is going to sink us all?' he asked.
Sign of the slump: An unfinished housing estate near Drogheda, Co. Louth. Irish properties prices have halved since 2007, leaving banks saddled with huge losses

Sign of the slump: An unfinished housing estate near Drogheda, Co. Louth. Irish properties prices have halved in recent years, leaving banks saddled with huge losses

Ireland’s profligate banks have not fully faced up to the vast losses on their mortgage books, he said. As a result, the cost of cleaning up the banking system will be some £17.2billion (€20billion) higher than the government’s own £43.1billion (€50billion) estimate, Prof Kelly warned.

The eye-watering cost of purging Ireland’s crippled financial system - equivalent to nearly £13,400 for every Irish citizen - is the legacy of a decade-long property boom that imploded spectacularly in 2007.

Since the crash, Irish properties prices have halved, leaving its reckless lenders saddled with gigantic losses and the former ‘Celtic Tiger’ on the brink of catastrophe.

Ireland’s budget deficit is set to rocket to an alarming 32 per cent of national output this year and more than one in eight workers cannot find a job.

Fears that the country will be unable to service its debts have already seen international investors shun Irish government debts in recent weeks, pushing its cost of borrowing to fresh highs on virtually a daily basis.

Investors have also been spooked by the looming crisis in the country’s parliament. Ireland’s government is a shaky coalition between the centre-right Fianna Fail party and the left-leaning Greens, whose majority is set to fall to just two seats after a parliamentary by-election later this month.
Irish Minister for Finance Brian Lenihan

Tough times ahead: Irish finance minister Brian Lenihan, left, and premier Brian Cowen will need the support of a number of coalition partners

Mr Lenihan and Irish premier Brian Cowen will need to keep a raft of independent MPs, backbenchers and his coalition partners on-side to push through the toughest austerity budget on record.

On top of that, an increasingly ugly mood is taking hold among austerity-weary taxpayers, and Fianna Fail is facing annihilation at the next general election, which has to be held by the Spring of 2012.

Shares in Ireland’s banks hit fresh all-time lows yesterday and the state’s borrowing costs reached new euro-era records amid growing doubts over the country’s ability to re-pay its investors.

Ireland is not at immediate risk of bankruptcy as it has enough cash to survive until the middle of next year, but will have to test the water in the New Year as its money drains away.

Shares in Allied Irish Banks, Bank of Ireland and Irish Life & Permanent all hit new lows durign the session, with AIB and BoI eventually clawing back their losses.

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