‘15% chance we’ll default on debts’

THE risk of Ireland defaulting on its debts next year was put at 15% by a leading economist.

Dan O’Brien was speaking to journalists after he addressed the annual lunch of ISME, the employer lobby group, in Dublin.

Expanding on his pessimistic view he said the global economy was in the worst place since the great depression and Ireland was in deeper trouble than most other economies.

In that context the possibility of the Irish economy defaulting on its debt could not be ruled out, he said.

The Government’s plan to raise taxes in the next two budgets was a mistake, he said. Other countries have cut government spending, which is what should have been done here. It was more certain and calculated to have a quicker impact on getting us out of this mess.

That view is supported by international experience, he said. Also when confronted with the economic crisis of 1987 former Finance Minister Ray MacSharry cut spending and it was very effective, he said.

Spending on the National Development Plan could be cut easily, while “the elephant in the living room was social welfare”.

While it sounds “harsh”, O’Brien said the crisis here is so severe that all options have to be considered.

Given the gravity of the problems, he said, the Cowen administration made a strategic error in putting tax cuts at the centre of its reform strategy.

The experience elsewhere has demonstrated spending cuts were a much more effective away of getting the national finances back under control. “The increase in taxes is very high. It’s a major adjustment. International experience has shown that is not what stabilises a public fiances crisis, and this is the mother of all public finances crisis,” he said.

Expanding his view he said the euro zone contraction was worse than expected and “we are in a deep dark hole” globally.

“It may be that we have hit the bottom but it is not at all clear this is the case”.

In the US a further major lending screw up, reminiscent of the sub prime lending crisis may be about to unfold, he told those attending the ISME lunch. The big fear is that reset mortgages written by US lenders could do enormous damage this year and next.

These were to good credit worthy borrowers, who had most of the interest as well as the capital payments put on hold for a fixed period.

Those terms are about to lift and the fear is that the level of defaults could push the US and the globe into an even deeper financial mess, he said.

Having been accused of being too pessimistic Mr O’Brien said the services sector of the Irish economy had performed very well while it still remains an attractive place for inward investment. Ireland has one of the world’s most educated workforces and is in the top five in terms of those with graduate qualifications.

He warned, however, the O’Bama tax changes will have an impact with regard to winning overseas investment from the US.