NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

The Irish Bailout a “World Record”


That’s gonna sting!

The additional €35bn (£29.8bn) being ploughed into Ireland’s banks has shocked experts, who have expressed concern that tonight’s bailout would not contain contagion in the eurozone.

Brian Lucey, associate professor of finance at Trinity College Dublin said he was “stunned”, adding: “We’ve already put at least €32bn into them, so that’s going to be €67bn, which is 50% of GNP, that’s a world record”.

He also warned that a new government next year could rip up the deal. “Sovereign governments have a right to effectively do whatever they want,” he said.

The EU authorities had hoped that the Irish bailout would draw a line in the sand and halt the threat of Spain and Portugal needing international assistance. But tonight, investors and analysts were far from certain that this would be achieved.

Ashok Shah, chief investment officer at investment firm London & Capital, said Ireland might now enjoy some “temporary relief”, but that bond investors’ concerns could now switch to Portugal and Spain.

“Portugal is already in the borderline, it will have to be rescued soon, maybe within a matter of weeks. The market will also focus on Spain. It will remain very volatile.”

A bigger-than-expected bailout for Ireland — does anybody expect Portugal or Spain (or Italy) to do any better? And what if it’s not just the PIIGS?

Years ago, a fellow calling himself Gekko wrote a column for National Review, called “Random Walk.” He predicted that the euro would be inherently unstable, because the economies it covers are so different from one another. I suspect Gekko is starting to feel vindicated, and I hope he has invested accordingly.

Prediction: The fiscal imbalances about to be worked out, probably violently, in the markets and budget committees will change our lives more than Islamic terrorism has or will.

The European disease is headed to these shores. As Michael Barone points out today, California, Illinois, New Jersey, and possibly New York are headed toward insolvency. Once you look at the crisis in public-employee pensions, twenty or thirty U.S. states may be headed for insolvency. We may end up in a situation in which 35 states are looking to the other 15 to bail them out. And when the house of cards starts to tumble, it will happen faster than anybody expects. Texas isn’t going to be able to carry the Union by itself.

I am surprised to find myself writing so many agreeable words about Erskine Bowles lately, but the former Clinton man hit it right upside the head with this one:

“The markets will come. They will be swift and they will be severe and this country will never be the same.”

On the other hand, once politicians are cut off from the endless stream of free money that has made being in government so much fun for the past couple of generations, maybe they will make less trouble. I find that possibility inspiring.

Less inspiring is this from Mark Zandi of Moody’s:

It may seem odd given all this, but I’m optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn’t good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult – for context we spend more than $100 billion a year in Iraq and Afghanistan – but it is doable.

Particularly encouraging is the intellectual consensus now forming. You can see it happening around recent proposals from two different bipartisan commissions formed to tackle long-term federal budget issues. While the proposals will not become law, they lay down important benchmarks and establish the basis for a healthy and ultimately successful debate.

What part of “unacceptable” is eluding Mr. Zandy, I wonder? That’s how Nancy Pelosi described the bipartisan proposal around which he believes a consensus may be forming. The Democrats are standing by her, the unions are howling, and President Obama is showing no signs of getting behind the chairmen of the deficit commission he appointed.

There will be reform. It may come from Republicans, over the protests of Pelosi, Reid, et al. I think more likely it will come from the bond-market vigilantes, and that it will be “swift and severe, and this country will never be the same.”

But, hey, everybody ran up their credit cards last Friday, and it some alternate universe that apparently is good news. Don’t worry: You’ll get to pay that Visa bill off in devalued dollars. Merry Christmas, suckers.

– Kevin D. Williamson is deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, to be published in January.

Tags: Bailouts , Debt , Deficits , Despair , Europeans , General Shenanigans


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