Nobel Economics Prize winner Paul Krugman, the New York Times columnist is the latest U.S. commentator to say Ireland has made a major mistake in agreeing to underwrite bank losses
According to Krugman, the Irish story began with what he describes as “a genuine economic miracle”.
He says the speculative frenzy that followed was “driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians”.
When the property bubble burst the Irish banks were faced with huge losses resulting from the reckless loaning.
He describes the Irish Governments bank guarantee in plain terms: “The Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations”
Before Ireland's banks went bust he notes, Ireland had little public debt.
“But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts”
The columnist insists that Irish citizens are now bearing the burden of debts incurred “by private wheeler-dealers”
“Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment”
He goes onto describe Ireland's rescue package funded by the EU and IMF: “what really happened was that the Irish government promised to impose even more pain, in return for a credit” line”.
Comparing Ireland's debt woes to Iceland, Krugman recalls a joke.
“In early 2009, a joke was making the rounds: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.” This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn’t be compared with the utter disaster that was Iceland.”
He added that Iceland seemed to be doing better than Ireland with less severe job losses.
“In fact, investors now appear to consider Iceland’s debt safer than Ireland’s,” he adds.
The reason for this, he maintains, is that Iceland Iceland’s foreign lenders payed the price for their poor judgment.
He concludes: “Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.”