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SATYAJIT DAS warns of Irish contagion

MARK COLVIN: The sovereign debt crisis that rocked Southern Europe has now caught up with the nation that used to be called the Celtic Tiger. Ireland with its public finances in disarray and its banking system busted is weighing up a multibillion dollar bailout offer from the European Union.

A leading risk analyst is warning that the Irish crisis could spark a new sovereign debt contagion, one which could ultimately bring down the Euro zone. Satyajit Das was a Cassandra of the credit crash and also predicted the sovereign debt woes. He says Australia and its key Asian markets are not immune from Europe’s pain.

Stephen Long began by asking him about the problems of Ireland.

SATYAJIT DAS: They have now an economic problem and a banking sector problem.

The economic problem is they’ve taken the austerity cure that’s been prescribed for Greece and it hasn’t worked. The economy has shrunk by 20 per cent, unemployment is in double digits. Effectively their debt is now at 65 per cent of GDP.

On top of that they’ve got a banking crisis. And that’s because essentially the Irish economy was built on commercial real estate and residential debt for buying property. And that has collapsed, leaving the three banks in Ireland basically insolvent.

The Government will have to put in something like 35 to $40 billion into the banks to stabilise them. Business is unsustainable.

STEPHEN LONG: Well there is a rescue package in place in Europe. But you’re of the view that it’s not going to work. You expressed that view in a recent Financial Times article. Why do you think it won’t work?

SATYAJIT DAS: The problem with that is multiple. The way it works is all the countries in the Euro zone guarantee each other. Now this is like having a whole bunch of mountaineers literally tying themselves to each other. And if they keep falling off one by one they’re going to take the whole lot with them.

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