Ireland Calling by John Spain
We’re too good for our own good - Ireland’s image in Europe isn’t doing us any favors
Posted on Thursday, September 20, 2012 at 09:23 AM
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|Irish Finance Minister Michael Noonan (right) talks to euro group president Jean-Claude Juncker in Cyprus|
Being the best boy in the austerity class is not getting us anywhere. That much was clear at the end of last week when our Minister for Finance Michael Noonan returned from yet another meeting with the finance ministers of Europe with his hands -- and his pockets -- empty.
He got lots of praise, of course. One paper here suggested that the top of his bald head must be sore from all the patronizing pats he was getting from the financial big wheels in Europe.
Ireland again was held up at the meeting as a lesson for the other impoverished European countries in how to stick to an austerity program. Our financial betters again said we are the perfect example of a mature country quietly doing what it takes to restore budgetary discipline, cutting spending and hiking taxes. And we're doing it without all the unpleasant smoke and riots that can be seen on the streets in Greece, and even without any of the tiresome posturing and whinging and mass marches that have been going on in Spain or Portugal or Italy.
We're the best, we were told. We had praise heaped on us again.
And that's fine. But as my granny used to say, all the praise in the world won't put butter on your bread.
We're only a couple of months away from what will probably be the most difficult budget ever faced by the Irish people. We desperately needed a deal on our debt to cut us some slack and give people here some hope.
But in spite of weeks of hints and half promises from Europe, we got nothing.
Even with a deal, a very severe budget will still be necessary because we're at least a few years away from getting spending back in line with revenue. But a deal on the impossible burden of debt that is crushing Ireland would have shown people here that there is light at the end of this very dark tunnel.
Instead, all we are looking at this week is blackness.
What seems to be holding everything up is the attitude of Spain, which went through a property boom and bust like us and is now just as broke as we are.
The Spanish are opposing a financial rescue package which would turn the enormous losses in their banks into sovereign debt. And they seem to be winning the battle.
This is exactly the issue that has sunk Ireland. What happened here is that our banks went belly-up a few years ago when the property market crashed, owing tens of billions to investors and bondholders.
The money markets stopped lending to us and the EU-IMF bailout was brought in to rescue us from financial and social collapse.
The billions we got came with a heavy interest rate and with strings attached, mainly the order from the European Central Bank that no banks would be allowed to fail, no bank debts would be written down and no bondholders would be burned.
Instead of putting the money directly into our banks, the EU-IMF bailout loaned the billions to the Irish state so that it could recapitalize the Irish banks, and in turn the banks would be able to repay the billions they owed to German and French banks and to other bondholders.
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 EU-IMF bailout conditions reinforced that guarantee. The effect was to turn tens of billions of private banking debt into sovereign debt (debt owed by the Irish state).
Because tax revenue here had collapsed after the property crash, our budget deficits were huge. The Irish state was bankrupt, and on top of that the Irish taxpayer was left carrying the can for the enormous bank losses.
The German and French banks and bondholders who 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. The European Central Bank which was supposed to be regulating banking in Europe and had failed to spot the bubble in Ireland was off the hook.
They all got their money back, even though the Irish banks were bust. The only people left hanging were the Irish taxpayers who were now lumbered with the total cost of the mess.
The cost of bailing out the Irish banks was around €64 billion, a gigantic sum for a country the size of Ireland. The tens of billions of private bank debt which were shifted on to the Irish taxpayer is close to half of our total debt mountain, the rest being the result of our accumulated budget deficits.
Without that extra load to carry, the Irish state might have been able to cut spending and sort out our financial crisis 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.
As I have said before here, we were stitched up.
The reason given by Europe at the time was that any bank collapse or any burning of bondholders would shatter confidence in the markets and have a domino effect across the other weak countries.
But there's been a lot of water under the bridges in Greece, Portugal, Spain and Italy since then. The increasingly desperate attempts in Europe to stop the spreading financial contagion led to the realization that loading up these countries with sovereign debt on top of accumulated budget debt was likely to make the situation worse, not better.
So we have the new ESM bailout fund, due to kick in next month, which seems to be willing to muddy the water about exactly what is sovereign debt. And we have the ECB President Mario Draghi twisting German arms to get agreement that the bank can buy bonds of countries in trouble without any limits and at much lower rates that the markets demand.
So when Spain gets into the same kind of trouble Ireland is in, a different set of rules is being applied.
The reason is that if Spain or Italy were to collapse, the euro would be finished and the European Union would be in serious trouble.
At the EU finance ministers meeting last week, all the concentration was on the bigger problem of Spain rather than on finding a way of lessening the burden on a little country like Ireland. So we
were ignored, apart from the few pats on Michael's shiny head.
In a way, our good behavior in meeting all the budget targets set by the EU-IMF has worked against us. We have also managed to get back in the bond markets ahead of schedule, even if it is on a very limited basis, and that has allowed the powers that be in Europe to think that we are doing okay and don't need to be given a break on our debt.
Nothing could be further from the truth. The crushing debt burden we have to service is taking billions out of here every year and will go on doing so way into the future, leaving state services cut to the bone and no money left for the investment we need to make to get our half a million unemployed back to work.
Most economists here agree that although we can muddle on for a few years, there can be no long term solution to our financial crisis without debt forgiveness or sharing.
Apart from that, of course, there is the moral question. Why should Irish taxpayers who played no part in the property bubble have to pay back the money lost by German and French banks and bondholders who gambled on the Irish property boom by lending billions to our banks? They lost the bet but they still get all their money back?
Meanwhile, the Irish taxpayer is being fleeced. Where is the justice or fairness in that?
It's not that the EU has anything in particular against Ireland. It's just that we were unlucky enough to be the first EU country to hit the skids, and we have been forgotten in the chaos that has ensued.
The EU, for all its talk, is hopeless at taking action. It puts every decision off until a crisis looms and even then it is slow.
In the EU's view, Ireland does not need immediate fire engine intervention, so it can be left to one side for the moment while more pressing matters are dealt with. That may sound simple, but it's true.
The only way out of this is to ditch our “best boy in the class” image and become awkward and difficult like Greece or Spain. It's not in our nature to complain, of course. (That's what 800 years of oppression does to you!)
But the next time Noonan gets a pat on the head instead of debt relief, we should all be out on the streets.
You don't think we're up to it? Just wait a couple of months. The upcoming budget in December could be the turning point.