Ireland Calling by John Spain
Let’s get a European divorce -- Angela Merkel drops a bomb on Enda Kenny over Ireland’s debt deals
Posted on Thursday, October 25, 2012 at 09:36 AM
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|Enda Kenny meets with Lithuanian President Dalia Grybauskaite |
and German Chancellor Angela Merkel in Brussels last week.
After months of attempts to ingratiate himself with German Chancellor Angela Merkel in a manner that most people here regard as demeaning, including lots of kissy kissy stuff on red carpets, Kenny was brought back down to earth with a bang last Friday.
Merkel dropped him like an unwanted boyfriend. She didn't even bother to let him down gently. There would be no retrospective deal on banking debts, she said in an interview after a meeting of EU leaders in Brussels.
She was answering complicated questions about the Spanish economy at the time, but the implied message for Ireland was clear. The deal we have been pushing so desperately for on our "legacy" bank debt is a pipe dream. We can forget it.
Merkel's comments caused consternation in Dublin and the phone lines to Germany were busy over the weekend, as officials pleaded for a more nuanced statement from her that would not leave Kenny looking like a lovesick fool. And eventually after a 30 minute phone conversation between Kenny and Merkel, an agreed statement by both was issued which referred to Ireland as a "special case."
It was the kind of support that could mean anything. The truth is that she had let the cat out of the bag.
For the past year and a half -- in fact since the day it came into office -- this government's main priority has been to get a better deal on the enormous banking debt that is suffocating the country.
Kenny and his Minister for Finance Michael Noonan have been engaged in a charm offensive, sweet talking the other nations in Europe, particularly the Germans and the French, to convince them that Ireland deserves some kind of bank debt relief.
We have toed the austerity line. We have done everything Europe and the troika have asked of us. We have been held up as the bailout poster boys of Europe, the proof that an economy can be fixed if cutbacks are implemented and a program is followed.
We are not there yet, of course. But we are heading in the right direction.
We have been able to show the rest of Europe that we are slowly getting our spending under control and our economy back on track again. We have been able to show that we are tackling our budget deficits and that we will be able to deal with the sovereign debt that those deficits have built up, difficult though that will be.
But we have also told Europe repeatedly that our mountain of banking debt is just too big for us to carry. Repayments on a debt that size would condemn us to recession and poverty for decades and are doomed to failure anyway because it would be impossible to extract that much money every year from the Irish economy without provoking a nationwide revolt.
We have tried to argue our case both by appealing to Europe's sense of fairness and their sense of logic and also by ingratiating ourselves with the big powers in Europe.
To say Kenny has been on a charm offensive is an understatement. He has been glad-handing and air kissing Merkel and the others as if his life depended on it.
Our objective is to get the rest of Europe to agree that sovereign debt and banking debt must be separated. If that is done and our banking debt becomes Europe's problem, where it rightly belongs, we have some hope of recovery. If that doesn't happen we are doomed.
At the end of June, as impatience grew here over the situation, a summit of European leaders seemed to offer us hope. As the summit finished Kenny joyfully told us that what had been agreed amounted to a commitment to separate bank debt and to get Europe to carry the cost of refinancing banks. It would take time to work out the details, we were told, but the principle had been established.
Soon, however, it became clear that Kenny was overselling what had been agreed. The very next day, in fact, the German finance minister said that he believed that the cost of bank recapitalization should remain with the sovereign. Last month he was joined by the Dutch and Finnish ministers for finance, and all three said that there could be no retrospective deal on banking debt.
To that can now be added Merkel's blunt statement last Friday along the same lines. "There will not be any retroactive direct recapitalization," she said.
Her attempt after the weekend to soften the blow was hardly convincing. The agreed statement said that the Eurogroup would "examine the situation of the Irish financial sector with a view to further improving the sustainability of the well performing adjustment program." It also said that "[we] recognize in this context, that Ireland is a special case, and that the Eurogroup will take that into account."
You don't have to be a diplomat to see that this reassurance could be interpreted in various ways. It's very far from a clear statement that Ireland's sovereign and banking debt will be separated and that the ESM (the new rescue fund) will buy into the bank debt which our government now holds.
This is an absolutely make or break point for Ireland. The last Irish government, bullied by Europe, pumped €64 billion into the Irish banks to enable them to repay their debts without going bust.
As I pointed out in a recent column here, this means that almost all the money we’ve got from the bailout so far has not gone to keep our schools and hospitals running. Instead it has been used to allow our banks to repay their bondholders, in Germany and other countries.
These bondholders loaned money to the Irish banks so they could get a share of the higher returns that were on offer here during the boom. It was a gamble ... and they lost.
But instead of being allowed to burn the bondholders, the Irish government was forced by the European Central Bank to pay all of them back in full, including junior and unguaranteed bondholders. Either that or we were not getting the bailout.
The mountain of banking debt was turned into sovereign debt owed by the Irish people. In return we got to own the banks, but the cost was the gigantic €64 billion euro bank debt we are now carrying.
The bondholders -- all of them -- should have been forced to take a hit, but this was ruled out by the ECB because they feared it would undermine confidence in European banks with consequences that would be disastrous for the EU.
So the ordinary Irish taxpayer became the sucker in the game of protecting the European banking system, facing decades of high taxes and low state spending so the country can pay off the bank bondholders.
Complex though it is, most people here now understand that this is unfair. What should have happened is that all the bondholders should have been forced to share in the pain, and unguaranteed bondholders should have been burned.
Anglo Irish and at least one other rogue bank should have been allowed to collapse altogether, with nobody except small depositors getting their money back. (Anglo alone is responsible for half of the bank debt we owe.)
The ECB, instead of forcing us to turn the bank debt into sovereign debt, should have been facing up to its own responsibility for what happened during the boom here. The ECB is supposed to regulate banking across Europe, but it allowed the Irish banks to run wild during the boom and the European banks to fund the madness. That failure must carry consequences.
When you add to that the fact that €100 billion of Greek debt was subsequently written down and bondholders were burned, and also that other European countries which have since got into trouble like Italy, Portugal and particularly Spain are all being treated differently than Ireland was, it becomes clear why people here are so angry. The automatic loading of banking debt on to sovereign debt in the case of Spain, for example, is not being tolerated by that country.
So far Merkel, the ECB and the financial hardliners in Europe are taking the view that in the case of Ireland, what was done is done and there's no going back. The way we were forced to "socialize" our banking debt mountain may make us "unique" and a "special case," but there is no explicit undertaking yet by Merkel and the others to reverse the situation.
A partial fix has been hinted at, but even that is uncertain. Talk is cheap and that's all we've got so far.
The bottom line on all this is that the €64 billion in bank debt we are being forced to carry (and a lot of the bondholders have already been paid in full) is money that should never have been paid back at all. It certainly should not have been loaded on to ordinary Irish taxpayers.
The ECB failed to regulate, the bondholders took a gamble in the Irish market, the ordinary Irish taxpayers had little or nothing to do with what happened. They should never have been forced to take responsibility for the debts of Irish banks and for the €64 billion that has been and is being paid back to bondholders.
If the ECB wanted to give the billions back to international investors who had lost it in Irish banks that are now effectively bust then they should be doing it with their own money or money from the financial rescue funds in Europe. If the aim was to prevent contagion of the European banking system, that's OK but it's the business of the ECB, not the Irish taxpayer.
The bottom line is we never owed this money and we need it back. Instead of air kissing Merkel, Kenny should be threatening her with an Irish divorce from Europe.