Nobel laureate Joseph Stiglitz said Ireland is in a “dismal” position and there is little chance that the government’s measures to reduce the budget and bail out banks will be a success.
“The austerity measures are weakening the economy, their approach to bank resolution is disappointing,” Stiglitz, a Columbia University economics professor, said in a Bloomberg Television interview in Hong Kong today. “The prospect of success is very, very bleak” for the government’s plan to resolve the problem, he said.
Irish bonds have plunged in the past month on investor concern the government will have to turn to the European Union and International Monetary Fund for aid. Finance Minister Brian Lenihan has said Ireland won’t need external help and central bank governor Patrick Honohan said yesterday he expects the government to be able to return to the bond market next year.
Ireland has since 2000 seen “a property bubble and excessive expansion of the financial system, fake growth is all you can call it,” Stiglitz said. “It is not a surprise to see a spiking of the spreads between the interest rate that Ireland has to pay and Germany’s.”
The premium investors charge to hold Irish 10-year bonds rather than benchmark German bunds widened to a record 651 basis points today. That compares with 422 basis points a month ago.
Ireland had the highest euro-region budget deficit in 2009, at 14.4 percent of gross domestic product, followed by Spain and Portugal, the EU’s statistic office said Oct. 22.
Stiglitz also said that one reason for the “bleak” prospect for Irish budgetary success is that the “authority that helped create the problem stayed in power.” Ireland’s ruling Fianna Fail party, led by Prime Minister Brian Cowen, dropped to its lowest level of support last month, according to a Red C poll published by the Sunday Business Post newspaper on Oct. 24. The party has been in power since 1997.
The economics professor said the uneven pace of economic growth between Asian and advanced economies has created a “divided world” on inflation. Inflation “won’t be the major problem” for most advanced economies like the euro region and the U.S., whereas it is a “concern” for Asian policy makers, he said.
The U.S. Federal Reserve’s plan to expand stimulus will lower the dollar’s value and fuel potential asset bubbles in emerging countries, which may drive up commodity prices and hurt the U.S. economy in a “backfire,” Stiglitz said.,
“The U.S. could wind up in the position of stagflation,” Stiglitz said. “We are facing higher commodity prices -- at the same time, we have weak aggregate demand in U.S.”
China raised reserve requirements for some banks twice yesterday, taking the total increase to 100 basis points for a few lenders, said two people with direct knowledge of the situation. Chinese inflation accelerated to the fastest pace in two years in October.
China will likely further tighten policy by quantitative tools like the reserve requirement ratios for banks, rather than raising interest rates, Stiglitz said.
“If you raise the interest rates to dampen on the economy, you could get inflow of capital,” he said. “That could make things worse.”