Ireland Calling by John Spain
Ireland is facing years of painful debt
Posted on Wednesday, November 24, 2010 at 09:51 AM
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|Protest outside government buildings as IMF arrive|
The Irish government, having denied for the past week that it was negotiating a bailout, finally admitted last weekend that we do need to ask the IMF/EU for tens of billions of euro, with sources indicating that the bailout could be as much as €90 billion.
With no credibility left, the government is now on the brink of collapse and may not last long enough to get the budget through in a couple of weeks. One way or another it will be gone by the end of January because the Green Party has said it won’t stay in government any longer than that since so many people want an election.
With the rug pulled from under him without warning, Taoiseach (Prime Minister) Brian Cowen has now accepted that an election has to be held early in the New Year, as soon as the financial measures in the budget have been voted through.
So on top of our financial crisis we now have political uncertainty. At the very time we need stability to get a draconian budget through and the four-year plan for economic stabilization underway, the administration here is becoming a shambles. Two of the independents who have been keeping the government in power have already said they may not support the budget.
There may have to be an election before a budget can be voted through. If there is a new government, it may want changes in the budget and/or the four-year program of cutbacks which it has not drawn up and which will be announced this week.
That puts a shadow of doubt over the present negotiations with the IMF. And frankly, there just isn’t time for this messing around.
It doesn’t really matter who is in government. The ones calling the shots here now are the IMF and the EU officials, and we all know what’s coming.
Most people here are resigned to the drastic cutbacks that are on the way. They are depressed and fearful. But they know that somehow we will survive.
Life will go on, even though it means a return to lower pay, to higher unemployment and the return of mass emigration, to the poor nation status we used to have back in the days before the Celtic Tiger gave us delusions of grandeur.
So yes, we will survive. We’ve been poor before, so we can do it again.
But as well as the feelings of depression and resignation here right now, there is also seething anger at those who got us into this mess, those who have shamed us in the eyes of the world.
It’s the humiliation that’s the hardest part to bear. And it’s humiliation on a global scale, with Dublin full of camera crews and reporters from all over the world these days.
They’re here to watch the IMF take charge of the economy we have so comprehensively wrecked. They’re here to watch the IMF sorting out our mess, a mess we are incapable of sorting out for ourselves.
These past few days it has felt like there was nowhere to hide our shame. Our pathetic tale of stupid excess and gross mismanagement was being spun out again and again by the TV reporters for the world to see.
Look, it’s the Paddies … the mad Irish who thought a property bubble was the same thing as economic development! The crazy Irish who paid themselves telephone number salaries and spent and spent even as the real economy was crashing around them! The lunatic Irish who borrowed and borrowed until no one would lend us any more!
Which, of course, is why the IMF is here.
It’s the barely concealed contempt in the reporting of the foreign press that has hurt the most. We can see it on the front pages of foreign newspapers and on satellite TV as the reporters from abroad stand in front of our mothballed construction sites and try to explain how idiotic we have been.
This is usually followed with shots of people sleeping rough, or shots of beggars on the streets, although the truth is that (so far) we have no more homeless or beggars here than anywhere else.
One photographer even got a shot of a beggar with arm outstretched as the chief of the IMF delegation passed by on the footpath on his way to his first meeting in the Central Bank. The fact that the beggar was clearly a foreigner only slightly spoiled this money shot that went around the world.
The head of the IMF in Dublin and a beggar in one frame! Perfect!
Much more interesting than the beggar was the fact that the IMF chief had chosen to walk the half mile from his hotel to the Central Bank (instead of being driven there in a limo, like an Irish junior minister). Clearly a message about what the future holds.
Also interesting was the fact that he was going to the Central Bank first, not the Department of Finance, the message being that no one trusts any figures that come out of that department any more.
Or maybe it was just that he wanted to have a look at Anglo Irish Bank, the rogue outfit that caused most of our problems, which he passed on that morning stroll to his first day at work here.
It was the Anglo Irish debacle, you will remember, that prompted the “Can One Bank Bring Down a Country?” headline in The New York Times, the headline that was ridiculed here. Now it does not seem so ridiculous.
Anglo Irish, and the other Irish banks that followed the Anglo gallop into the property bubble, have indeed brought the country to its knees.
Our budget deficit may be huge, but we could have sorted it out ourselves with severe cutbacks over four or five years. But adding the cost of rescuing the Irish banks on top of that has pushed us beyond what the Irish state can manage.
It is now clear that when the government gave its guarantee to the Irish banks two years ago the banks deliberately hid much of the gigantic losses and liabilities they had. The bankers involved were so incompetent it is even possible they did not know the truth themselves.
But what was initially supposed to be a just a few billion soon became €20 or €30 billion, then a few months back about €50 billion, and now the hole in the banks is put at around €90 billion.
In the past few months the markets stopped lending to Irish banks and big deposits started to flow out (over €20 billion in the past six weeks).
The Irish banks turned to the European Central Bank (ECB) which, on top of around €30 billion they got from the Irish Central Bank recently, has pushed around €130 billion in total into them to allow them to function.
This could not continue. Ireland, with an economy that amounts to about 2% of the EU economy, was eating up over one-third of ECB resources, money that might also be needed by banks in other weak countries like Portugal.
So about two weeks ago the ECB stopped dishing out the money and told the Irish government to go to the IMF and the new EU Stability Fund to access bailout funding for the banks and the state.
We had nowhere else to go -- the markets were looking for a prohibitive 9% on Irish bonds, a price that would bankrupt any country.
That is what is now happening. Without the IMF/EU money we would run out of funds in the middle of next year, with all kinds of state services being hit.
Apart from the banks, the IMF money means that the Irish government may not have to sell bonds for the next three years. So we will have a chance to recover -- or that’s the theory.
The reality may be different. The €90 billion question is whether even €90 billion will be enough.
Some economists here have worked out that between funding the state for the next few years while the deficit is brought down and sorting out what’s left of our banks, the total debt hole could be as much as a quarter trillion (€250 billion).
You start with the existing state debt and add in another €40 billion to get the state through the next few years. Then you add on the €130 billion or so the banks have borrowed plus all the extra billions needed to recapitalize them.
Then there’s the few billion to run NAMA -- the organization that is dealing with the bad property loans. And of course there’s all the interest we have to pay on all the money we have borrowed and must go on borrowing.
Before you know where you are you’re talking serious money, like a quarter trillion.
The interest on the IMF bailout of €90 billion at around 4-5% would be another €4 billion. (They call it a bailout, but it’s actually a loan.) Whether the Irish taxpayer and the Irish economy can bear such heavy interest payments year after year remains to be seen.
Certainly interest payments will eat up a lot of whatever income we produce, so the outlook for living standards here over the next few years is grim. Whether we can get through this at all is far from certain and will depend on getting growth into the economy.
And with so much being taken out, that’s not going to be easy.