The Irish are the patsys of Europe
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The deal for the €85 billion euro bailout for Ireland was done last weekend, with €35 billion earmarked for the banks and €50 billion earmarked to keep the state going for the next few years.
We're getting this vast amount of money from a combination of sources, from the International Monetary Fund (IMF), the European Union and a few individual countries, including the U.K. We're even being forced into taking some of it out of our own national pension reserve.
Getting the deal done is reassuring to some extent because it means we now have enough money to keep going for the next few years while our financial mess is tackled. Schools or hospitals won’t be closing, the police will still get paid, services will continue and welfare will be available to those in need.
This may sound a bit dramatic, but there was a real question mark over all that in recent weeks because neither the state nor the banks here could raise any more money on the markets. It currently costs over €50 billion a year to run the country, and we only raise €31 billion in tax revenue. There was a serious possibility that we were going to become a failed state in the middle of next year when the cash we have left would run out.
That can't happen now. And for that, I suppose, we should be grateful.
But there's not much gratitude in the air here at the moment. Instead there is absolute outrage, bordering on open rebellion. The deal may be done ... but the Irish people are not buying it.
The problem for the Irish and European leaders is that there has been a sea change in public opinion in Ireland over the past few weeks, a reversal of the previous public mood of resigned acceptance. The 50,000 strong protest march in Dublin last weekend showed just how much the public attitude has shifted.
What has changed is the hope that a lot of people were clinging to that somehow they would be able to get through the crisis without being affected too much. That hope has now evaporated.
People have woken up to the fact that the impact on their lives will be enormous. The bailout is going to saddle the country with huge debt for years to come, and that will filter down and squeeze everyone.
People have also woken up to the fact that nearly half of this bailout debt is being taken on so that the bondholders and foreign institutions that stupidly lent tens of billions to the Irish banks can get their money back.
Ordinary people here are now asking themselves why they should have to pay for this when they had nothing to do with the irresponsible behavior of the Irish banks during the boom.
So although the finance ministers from all over Europe met in Brussels on Sunday and signed off on the deal for Ireland, there is little or no support for it from the Irish people.
Taoiseach (Prime Minister) Brian Cowen held a press conference on Sunday evening to explain the details, but he’s not really convincing anyone. Instead of being grateful to Europe and the IMF for coming to our rescue, there is boiling rage among ordinary people here at the deal that has been decided over their heads.
There is outrage because this enormous debt will be a millstone around our necks for years to come. And in particular there is absolute fury that ordinary Irish taxpayers will have to repay the billions lost by our banks.
Everyone here accepts that cutbacks and extra taxes are necessary to bring our state spending into line with our sharply reduced revenue. For that reason there has been general acceptance of the four-year plan to bring down our deficit, even though it means severe cutbacks with a massive €6 billion adjustment in next week’s budget.
But the banks are something else. People here are now in open revolt over the bailout deal because, apart from giving us breathing space on the state finances, it will force us to pay back all of the billions owed by the banks. And it will let the bondholders off the hook instead of forcing them to share the pain.
The root cause of this is the absolute guarantee given by the Irish state to the Irish banks two years ago. The effect has been to turn the private debts of our banks into part of Ireland’s sovereign debt. Now we are paying the price.
The average interest rate on our €85 billion bailout package is to be 5.8%, a rate which is more than double what Germany has to pay this week to the markets for funds. So the word bailout is really a misnomer. It’s not a bailout -- it’s an enormous loan at a penal interest rate.
The €85 billion deal is going to cost us €4 or €5 billion a year in interest, and that will be on top of the heavy interest payments we are already making on our existing national debt.
It will make reducing our budget deficit even harder because the interest payments have to be taken out of revenue. That means there will be even less for day to day state spending, and the cutbacks in services will have to be even more severe.
There is also a question mark over whether this bailout will really plug the hole in our banks. Just weeks ago the government was saying that the total hole in the banks was around €50 billion.
We now know that the banks have already got €32 billion, and this bailout gives them another €35 billion, which adds up to €67 billion.
The bailout calculations do not allow for the huge amount of private debt default that is predicted over the next couple of years as the belt tightens. So a number of economists here are predicting that the hole in the banks will turn out to be €80 or €90 billion.
If this were to happen, the current interest payments could escalate from €5 or €6 billion a year to €10 or €12 billion. That level of interest payment would be impossible for us to meet without turning Ireland into a Third World country. Even as things stand right now, this bailout pushes us to the very edge of what is possible in interest payments.
Apart from decimating services, this heavy interest burden will make recovery and expansion of our economy difficult, if not impossible. The cutbacks are going to hit domestic spending so hard the economy will be knocked flat.
The next five or 10 years look grim, with the standard of living falling sharply and nothing in prospect but gloom and hardship at home and emigration the only escape.
So why is this so-called bailout so punitive? There is more than a suspicion here that we are being deliberately punished by Europe for the mess we have made and the threat the Irish collapse has posed to the euro.
There are also other factors at play. Most of the lending into Irish banks during the boom came from French and German banks, and the aim appears to be to ensure that they get all their money back.
And the European Central Bank (ECB), which is supposed to oversee the behavior of banks across Europe and was clearly asleep at the wheel in relation to Ireland, wants all of its money back as well. So even if it means unfairly penalizing the ordinary Irish taxpayers, that is what’s going to happen.
The Irish government had another option. It could have undertaken to sort out our state finances as promised by 2014, but it could at the same time have told the IMF and the EU that unless much more favorable terms (like 1 to 2%) were offered we would default on the money our banks owe.
It could have insisted that the foreign banks and bondholders who pumped money into our banks for very high returns during the boom must now take their share of the bust.
The Irish government could have done that, but instead they went on playing the role of the good boys of Europe doing what our masters tell us. There is a feeling here now that during the bailout negotiations last week the EU saw us as the patsys rather than the good boys.
Angela Merkel and some of the other EU leaders are now saying that in future situations like this, the money markets and bondholders who lend to countries that get into trouble will have to share in the losses that happen as a result. But that’s for the future.
The markets and bondholders who loaned money to Ireland are protected and therefore must be paid in full. As I said, we’re the patsys.
To summarize the public mood here at the moment, it would be fair to say that as far as the bondholders are concerned the majority view here now seems to be that even the senior bondholders (the more protected bonds which got a lower interest rate) should be forced to share the pain.
The view also is that we should immediately decouple our state finances from the finances of our banks. And we should burn those who poured the money into our banks which inflated our property bubble.
We should stop being the patsys. We should stop being the good boys. We should stop worrying about the euro and being responsible members of the EU.
We should start looking after Number One.