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The Irish Question

The Irish Question
from The Baseline Scenario by Simon Johnson

My Friday post on Irish credit default swap (CDS) spreads seems to have fed into a productive debate among experts on the Irish economy. Still, there is something of a puzzle here.

I was reporting public information from the CDS market, previously covered by Bloomberg, to motivate a call for action by the G7. The potential parallel between Ireland and Iceland is also an idea that has been around for quite a while.

The Irish Economy blog features contributions by some very smart people with a great deal of global experience. The tone in some comments on my postings is therefore a suprise. I was particularly struck by this,

“While the Irish fiscal and economic situation is severe, Ireland does not require any external assistance. It has a low public debt, an asset-rich sovereign wealth fund and plenty of capacity to raise taxes and cut public spending after a decade of rapid fiscal expansion.

Moreover, it is quite unhelpful for outsiders to call for intervention, since it adds fuel to ill-founded concerns about sustainability.

The CDS dynamics are similar to those of a speculative attack on a currency. While speculative attacks can be self-fulfilling if the fundamentals are weak enough, plenty of speculative attacks peter out and this is the most likely scenario in the Irish case also”

The first and third paragraphs make sense, and hopefully are correct. The middle paragraph is striking. If the fundamentals are strong, there should be no trouble fending off a speculative attack. Such attacks only have serious impact when they uncover deeper problems, or when the problems are already obvious to everyone, or when there is tactical mismanagement (very unlikely in this case, surely).

“Don’t make reference to our difficulties, if you are from the outside and speaking in public,” reminds me of Malaysia in 1997-98, where I did some (not well received by powerful people) work. I know why Malaysia was so defensive, but Ireland has always been open to all kinds of ideas and arguments.

If your country’s economic situation is strong, you can laugh off any suggestion that outside assistance is needed. If your situation is weak, discussing the pros and cons of approaching others for help makes sense. It is seldom a good idea to limit debate.

Markets are not moved by comments on someone’s website. They are moved by policy actions or inaction. Do you want policymakers to listen to a wide-ranging debate or not? If not, why not?

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