FORMER CHIEF ECONOMIST of the International Monetary Fund Simon Johnson has spoken about what Ireland can expect from its dealings with the IMF – and the future prospects of the country’s economy.
Speaking to Newstalk’s Business Breakfast presenter Margaret E Ward, Johnson said that the long process of repairing the economy had just begun.
Johnson, who is currently senior fellow at the Peterson Institute for International Economics, wrote an acclaimed article named The Quiet Coup, for The Atlantic magazine in 2009: Johnson speaks to Ward about this article, clarifies what we should expect from the IMF, and explains why Ireland might be looking to China for financial help in the near future.
Johnson explained the basic process involved in a country’s dealings with the IMF:
Basically you have to decide who’s going to be saved of the rich and powerful people – because it’s always the rich and powerful who have brought you to the crisis. So, which of those people get to stay on the lifeboat, and how will the costs of this crisis spread across society? This becomes a very difficult conversation - a struggle if you like. And this is really a backdrop to any IMF negotiation with a country getting a loan.
He also explained that Ireland is not alone in this crisis – but says that fact may be cold comfort:
I don’t know if it’s any consolation to Ireland but you’re not in this alone. Other developed countries have allowed their banking systems to become far too powerful; to take on reckless risks; and to capture the minds, hearts and perhaps pocketbooks of politicians. And the consequences – as you are now aware – of this are devastating. Always and everywhere.
The biggest problem is debt… If you don’t restructure the debt, will the markets say ‘Yes, this is a final resolution’ or will they just say ‘Well, we’ll go along with this for a little while but we’re likely to lose confidence again’?
It takes a while for it to catch up with you – maybe a decade, maybe less, maybe more – and when it does catch up with you it’s absolutely awful. And it’s going to be awful in many of these situations for a long time.
Johnson also spoke about the possibility of Ireland receiving financial help from China in the future:
If the problems spill over to Spain then you will be talking about a level of financial backing that can’t actually be afforded by the European facility and the IMF right now, and you’d have to look for additional resources around the world.
Now, the Americans could come and help you but, as you know, the US mid term election swung the politics towards the right – and a particular part of the right that is obsessed with a so-called ‘no bailout’ mantra. The Republicans now control the House of Representatives, so you won’t get more funding for the IMF from them and you won’t get direct loans of any scale from the US administration. So you have to look aroiund the world and say who is sitting on cash?
Your eyes fall naturally on the $2.5 trillion – or more – that China has. It would not surprise me at all if the Chinese were involved with buying Irish debt down the road… This is a tremendous opportunity for them – and an opportunity of course, provided by the policy failures at the European level and by the bizarre politics of the United States.
When asked about how long it will take for Ireland to come out of the crisis, Johnson said:
I’m afraid it’s going to take a long time. These situations are always traumatic. They are often accompanied by a big depreciation in the exchange rate which often fuels a recovery in emerging market situations – Korea after 1998 for example, Mexico after 1995, and Argentina after 2002 – But its very unlikely that Ireland is going to have that.
I don’t think Ireland will leave the eurozone, that would be too disruptive. I don’t think the euro is going to collapse like those other emerging currencies did in the past: It’s going to be a long haul even in the best scenario.
Countries to not go bankrupt and go out of business like companies do – but this be an issue that is with you for the best part of a decade.
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