Spotlight will now turn to scale of deficit

ONCE the future of Anglo is decided on over the next few weeks and the transfer of assets to NAMA proceeds as planned, a new report suggests the focus will shift back to the country’s mounting deficit, which last year was the biggest in the EU.

Both the economic crash and banking crisis have dramatically changed the appearance of the state’s balance sheet, according to a new analysis by economist Brian Devine of NCB Stockbrokers.

The Government’s plan is to reduce the deficit to 2.9% of GDP by the end of 2014, but it could end up with a deficit above 25% this year.

Given that scenario, the chances of the 2.9% figure being hit by 2014 “appears highly implausible”, he said.

Provided certain growth forecasts are met, and the Government sticks to its budget strategy, the 2014 target could be achieved.

Mr Devine is confident that the Government has enough determination to deliver on its 2014 pledge.

At present the cost of the bank bailout continues to dominate the headlines, as fears grow that Anglo’s troubles could end up costing the taxpayer €35 billion.

Currently the cost of 10-year money is 3.45% higher than rates being charged for German bonds.

That risk was highlighted yesterday in a New York Times article. Its authors are less optimistic about our future and warned the risk of Ireland defaulting on its debts over the next five years is quite high.

We could be the next Greece, according to economists Simon Johnson and Peter Boone.

Ireland’s financial stability remains highly uncertain, and its problems could ripple through Europe in the next few years, they warned.

Boone is a research associate at the Centre for Economic Performance at the London School of Economics while Johnson is the former chief economist at the International Monetary Fund.

“In the last few weeks, the perceived probability of default by Ireland (as traded in credit-default swap markets) has shot up, so that markets now price a 25% risk that Ireland will default within five years,” they said.

Roughly one-third of the loans on the balance sheets of major banks in Ireland are non-performing or “under surveillance” and “that’s an astonishing 100% of gross national product, in terms of potentially bad debts” and “it is now apparent that Ireland has not done enough to stem its march toward further crisis.”

“The ultimate result of Ireland’s bank bailout exercise is obvious: one way or another, the Government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts”, they said.

If the growth outlook for the economy plays out as the Government forecasts, “then the fiscal target “is achievable,” he said.