Ireland Double Dippyness Fuels Debt Market Worries
Not too long ago, Ireland was being lavished with praise by those who argue that governments need to chopping deficits. You’re not hearing too much of that talk this morning. Here’s why, via Dow Jones Newswires:
The Irish economy’s contraction in the three months to June will make it more difficult for the government to reach its goal of cutting the budget deficit to 3% of gross domestic product by 2014, and will feed concerns about Dublin’s ability to repay its debts without outside help.
But it will also fuel worries across Europe and beyond about the efficacy of austerity measures in tackling the high levels of public-sector debt many governments have incurred during the financial crisis and the recession that followed.
The Central Statistics Office Thursday reported that GDP contracted by 1.2% in the second quarter, a smaller decline than the 1.5% fall recorded in Greece in the same period.
The difference in yields between 10-year bonds issued by the German and Irish governments rose to a fresh record high of 4.32 percentage points from 4.27 percentage points before the data was released.
That spread is a measure of the perceived riskiness of investing in Irish government bonds.
“They’re a major disappointment and will add pressure on bond yield spreads on the international markets because investors will doubt that Ireland will be able to generate enough growth to meet its budgetary requirements,” said Bloxham Stockbrokers chief economist Alan McQuaid.
The fact that Ireland’s economy looks to be on the verge of a double-dip recession really shouldn’t come as a surprise. This is what economic orthodoxy would call for.Back in May, Carmen M. Reinhart co-author of “This Time is Different: Eight Centuries of Financial Folly” and Vincent Reinhardt — of the right-leaning American Enterprise Institute — wrote in the Washington Post:
The need for Greece and other European economies to slash government spending is not some artificial imposition by the IMF or the European Union. Once investors decide that a country living beyond its means will have a hard time meeting its debt obligations, spending cuts become a reality of arithmetic.
But fiscal austerity usually doesn’t pay off quickly. A large and sudden contraction in government spending is almost sure to shrink economic activity as well. This means tax collections fall and unemployment and welfare benefits rise, undermining efforts to reduce the deficit. Even if new borrowing is reduced or eliminated, it takes time to whittle down a large debt, and international investors are notoriously impatient.
Seems like that’s what we’re seeing this morning. And the resurgent euro worries, along with bad jobless claims numbers are adding to the risk-off phenomenon out there in the markets.
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