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I don't think budget deficits equivalent to 12%+ of GDP are sustainable except in an emergency and for a relatively short period.  Not only do you have the increased servicing cost, but the interest rates demanded by sovereign debt markets become unsustainable - as in the case of Greece.

It is, of course, arguable that the Government should have gone down the Greek route and kept incurring that level of borrowing in the hope that a quicker recovery in the economy and tax take would have enabled us to reduce the deficit at less social cost in due course.

However my point is that we should never have nationalised private debts in the first place.  We need a functioning banking system, but that need did not have to be fulfilled through bailing out existing bondholders in exiting banks.  The banks, especially Anglo - should have been allowed go bust on a Friday evening and reconstituted as new entities the following Monday.  

As David McWilliams has argued, banks go bust all the time, debts are restructured all the time, and there is no reason why such defaults should have had any longer term effect on Ireland's Sovereign debt rating.

Indeed, as we started out from a relatively low level of National debt (c. 28% of GDP at its lowest) 12% budget deficits would have been sustainable for a few years if we hadn't invented NAMA or bailed out the private banks.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 12th, 2010 at 07:07:31 AM EST
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