Ireland Calling by John Spain
Ireland will be watching Spain closely after 'Yes' result in EU Fiscal Treaty
Posted on Wednesday, June 06, 2012 at 09:43 AM
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|Taoiseach Enda Kenny speaks to the media on Saturday after the yes vote was confirmed|
You never show your hand at the card table, and you certainly don't give away the ace you are holding before the game even begins.
Yet by voting yes in last week's referendum on the EU Fiscal Treaty, that is exactly what Ireland has done.
It's a huge leap of faith, one we made very reluctantly in the hope that the EU will feel duty bound to pay us back with a fairer deal on our crippling bailout.
It's a jump we would never have made if we had an alternative. But there really was no alternative because we are likely to need more EU funds in the next few years, and a no vote would have made us ineligible for the new EU fund now being set up.
Our problem now is that we have given away our best card. Instead of holding the EU over a barrel, we are once again relying on the kindness of strangers, on the sense of fairness and justice of the Germans and the French. Whether they live up to our trust and expectation remains to be seen.
There was something pathetic about Taoiseach (Prime Minister) Enda Kenny immediately getting on the phone to the other EU leaders last Friday after the yes victory was clear to give them the good news. It smacked of the old cap-in-hand poor Paddy.
The reality is that Angela Merkel, Francois Hollande and the others have bigger worries than poor little Ireland and are already taking our yes vote for granted, even though a no vote would have caused some embarrassment for them. Eaten bread is soon forgot.
The difficulty for us is that Europe is a churning vortex of fiscal and banking problems at the moment in which Ireland is a very small and easily forgotten part.
The fact that we have been crucified with a massive, unjust and unsustainable bailout can easily be overlooked as the EU struggles to cope with the much greater problems of Spain, Portugal, Italy and Greece.
We could have demonstrated our anger at the situation by voting no. But we voted yes, and we are now expecting Germany and France to do the right thing and encourage the EU and the IMF to give us a fair deal.
When our banks went belly-up a few years ago and our budget deficits soared after the property crash, the markets stopped lending to us and the EU-IMF bailout was brought in to rescue us from financial and social collapse.
The billions came with a penal 5.8% interest rate, deliberately pitched high to punish us and show other countries there is no cheap and easy way out of national profligacy.
It also came with strings attached, mainly the diktat from the European Central Bank that no banks would be allowed to fail, no bank debts would be written down and no senior bondholders would be burned. Instead the bailout would give billions to the Irish state so that it could pay its own bills and also recapitalize the Irish banks. Our banks would then be able to go on paying back their debts even though they had lost billions in the property crash and were bust.
Not realizing the scale of what we were facing, the Irish government had already given a blanket state guarantee on all our bank debt. The bailout conditions cemented that in place. The effect was to turn tens of billions of private banking debt into state debt.
On top of our budget deficits, it left the Irish state bankrupt and the Irish taxpayer carrying the can. It meant that the German and French banks which had lent billions to the Irish banks to fuel the property boom here and get a slice of the action for themselves were home free.
They got all their money back, even though the Irish property market had crashed and the Irish banks were bust.
The tens of billions of private bank debt which were shifted on to the Irish taxpayer adds up to around 40% of our debt mountain, the rest being the result of our accumulated budget deficits.
As we said here recently, it is arguable that without that extra 40% to carry, the Irish state might have been able to cut back and cope with our fiscal situation without having to take a bailout.
But we were forced into taking the bailout and into agreeing that the Irish state would pay back all the bank debt. To put it simply, we were stitched up.
It took ordinary people here some time to grasp what had happened. We can understand why state spending and services have to be cut and taxes raised to get our budget deficits down.
But why should the ordinary person here have to endure all this pain to pay back foreign banks who were gambling on the Irish boom?
The main reason our ongoing deficits have remained stubbornly high in spite of cutbacks in spending is that so much of our revenue is now going to pay the huge cost of the bailout.
And a large part of the bailout is being used to pay down bank debt. As more and more people here understand this, the anger grows.
Which is why a no vote here last week was possible. The yes victory carries a huge expectation with it that the EU will do the right thing and give us a fair deal.
The cynicism here about the way we have been treated is widespread, and with good reason.
When we got our bailout it was at a 5.8% interest rate. When it later became clear that the Greeks could not pay that much on their bailout, a new mechanism was set up to give them the money at between 3.5% and 4% over a much longer period.
This new deal had to be available to everyone, of course, so suddenly Ireland's 5.8% rate was slashed to the same level and our repayment schedule was shoved out from 7.5 to 15 years.
Kenny tried to claim it as a victory for the government's negotiating skills, which is sad.
We were told there could be no debt write down, yet Greece was able to give a chilling haircut to the banks and markets who had lent it money.
In recent months we have seen the European Central Bank making around a trillion euro available at around 1% to banks across Europe to prop them up and stop them going bust.
Again, there was no sign of this kind of quantitive easing (printing money) when Ireland's banks were collapsing. But now that banks in big countries like Spain and Italy are in dire straits, suddenly the money can be provided.
Is it any wonder people here are cynical?
In the last few weeks as the situation in the banks in Spain (where there was a property collapse on the same scale as ours) reached critical level, it emerged that the new European Stability Mechanism (ESM) - the massive new permanent rescue fund now being set up for the EU - might be allowed to recapitalize bust banks directly.
In other words, the ESM would loan the money directly to the banks rather than to the state, thereby avoiding the Irish situation where private bank debt became state debt and the taxpayer gets screwed for years.
Here in Ireland we are watching this stuff going on, and all we can do is smile at the bare-faced cheek of it all. It's now clear that the real reason we were screwed in our bailout was because we were not big enough to be a threat to the EU. Unlike Spain.
The upside of all this is that if the Spanish banks continue to wobble, the deal they are cut by the ESM will have to be offered to us as well.
Not because we voted yes and are the good boys of Europe. And not because of Kenny's imaginary skill as a negotiator.
It will have to be offered to us because that's the way the EU operates. And if it's not, there will be an outpouring of anger here that will make Greece look like a picnic.
No one wants to wish ill on others. But if a few more banks in Spain like Bankia start looking for tens of billions to see them through, the ESM plan may have to be used. And if it is, it will also have to be given to
Ireland on a retrospective basis. That kind of deal could slice 40% off the top of the Irish national debt mountain (the segment that is due to our bank debt).
Whether it ends up being a direct recapitalization of Spanish banks by the ESM remains to be seen. It may even be a full bailout for Spain, as in the case of Ireland.
Whatever happens, you can be sure that Spain won't be asked to pay the 5.8% we had to pay or even the 3.5% to 4% that we now pay. And it will be interesting to see if there is a debt write down and how much of the bank debt becomes state debt and is loaded onto Spanish taxpayers.
The bottom line is that whatever they get, we have to get as well. And it has to be retrospective.
Ole! It's the Spanish solution to the Irish problem.