Someone to watch over us

From Times Online

G7 ministers ‘must help struggling Ireland’

Simon Johnson, former IMF chief economist, says country must not be next Iceland

Simon Johnson, the former chief economist of the International Monetary Fund (IMF), called for this weekend’s meeting of G7 finance ministers to put Ireland’s troubles at the top of the agenda.

His comments come as the cost of buying insurance against Irish government bonds soared to a new record high on Friday, having almost tripled in the space of a week. Debt market investors now rank Ireland as the most troubled economy in Europe.

Johnson said: “A key warning sign just moved from orange to red. The G7 ministers of finance and central bank governors need to focus on this problem during their discussions (this weekend). What is the strategy for Ireland? Does the European Union come in to help? Is this a job for the IMF?

“Just don’t, please, tell me more about the ‘basic principles’ of financial reform unless and until you have addressed the ‘Irish problem’. And don’t tell me, ‘the Irish have to sort this out for themselves’. Eventually, the world always comes to help; check your notes on Iceland. It’s much better and much cheaper to come in early and decisively.

“We need a plan of action for Ireland, and we need it now. What we don’t need is another Iceland-type situation.”

Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems which could ultimately fall to the state to resolve.

The Irish government has stated that it needs to borrow €20 billion this year. Gross debt as a percentage of the country’s gross domestic product, which was just 24.8% in 2007, will increase to 53% this year and 62% in 2010. These figures assume no worsening in the country’s finances.

The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every €100 of debt it would cost €3.50 to insure against default. A year ago it would have cost 10c to insure every €100 of Irish debt.
Insuring Greek debt against default costs about 250 basis points, while Italian debt insurance costs about 170 basis points. UK debt insurance, which has also spiked considerably, costs about 150 basis points.

Debt-market experts said any potential debt default in Ireland was still considered to be a long way off, but the problem would have to be addressed at some point.

One strategy being discussed by analysts as a possible solution would see Germany buy billions of euros of Irish government debt through a fund set up by the European Central Bank.

“I don’t expect Ireland to default, but it’s clear that something has to happen,” said one credit strategist at a large investment bank.

Fears of sovereign default are rising around the world. The IMF has warned that its pot of emergency funds to bail out troubled economies could run dry within months.

The organisation, funded primarily with contributions from the US and Europe, is thought to be in talks with China about securing a $50 billion (€38.8 billion) loan to shore up its coffers. However, talks could stumble over conditions attached to the deal.

A further $50 billion is expected to come from a Middle Eastern consortium, led by Saudi Arabia. The members of the G7 would also be expected to pledge about a further $100 billion as part of any refinancing deal.

Johnson worked at the IMF from March 2007 until August 2008 on leave from the Sloan School of Management at the Massachusetts Institute of Technology. He is considered an expert on economic crises. He has worked on crisis prevention and economic growth.