Irish Worries For The Global Economy

baselinescenario.com — Ireland, simply put, appears insolvent under plausible scenarios with current policies. The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits, while servicing all their debts and building more debt, is proving —not surprisingly — wrong. Such policies leave nations burdened with large debt overhangs that effectively tax businesses and borrowers — because interest rates must stay high to reflect risk. Investors must wonder whether businesses and homeowners can afford these higher interest rates, so banks and investors cut credit lines and reduce lending. This strangles economies, even when the fiscal authorities take tough steps needed to cut deficits.

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