Sunday, November 21, 2010

What Ireland Bailout Says About United States

The major international financial events in Europe tend to happen on the weekends, and the Ireland bailout is no exception. After talks that started Thursday, the Irish government is expected to draft a formal application for European aid tonight.

The aid comes as Ireland is looking for a financial backstop for its guarantee of its banks’ deposits. The government has already put $60 billion into stabilizing its banks, and revelations of new troubles came yesterday as Allied Irish Banks said it had lost $18 billion in business deposits this year, not quite a run on the bank, but a sign of loss of confidence that could turn into a run.

Ireland is also expected to undertake a four-year austerity plan, cutting government spending to match its tax revenues.

The situation in Ireland is rightly causing some concern about what could happen to other countries, including the United States. Ireland, like the United States, saw its economy grow top-heavy as real estate values went up and there was an excess of construction. The abrupt halt in this flurry of activity left its banks vulnerable.

The United States doesn’t face the same national risks from a run on its largest banks, however. Current U.S. law would direct the government to liquidate a giant bank if it should get into the kind of trouble that several of the largest Irish banks are in, and there would be a considerable advantage to the rest of the U.S. economy in that sequence of events. International financiers, therefore, cannot threaten the U.S. economy with an overseas run on the banks.

The risk in the United States, though, is not entirely different. If international investors begin to pull their money out of U.S. government securities, that works almost the same way as a run on a bank. And the United States, but for its size, is about five months away from being as financially vulnerable as Ireland was at the start of last week.