Ireland's Debt Servitude

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Stripped to
its essentials, the €85bn package imposed on Ireland by the
Eurogroup and the European Central Bank is a bail-out for improvident
British, German, Dutch, and Belgian bankers and creditors.

The Irish taxpayers
carry the full burden, and deplete what remains of their reserve
pension fund to cover a quarter of the cost.

This arrangement
– I am not going to grace it with the term deal – was
announced in Brussels before the elected Taoiseach of Ireland had
been able to tell his own people what their fate would be.

The Taoiseach
said afterwards that Brussels had squelched any idea of haircuts
for senior bondholders: a lack of “political and institutional”
support in his polite words: or “they hit the roof”, according
to leaks.

One can see
why the EU authorities reacted so vehemently. Such a move at this
delicate juncture would have set off an even more dramatic chain
reaction in the EMU debt markets than the one we are already seeing.

It is harder
to justify why the Irish should pay the entire price for upholding
the European banking system, and why they should accept ruinous
terms.

I might add
that if it is really true that a haircut on the senior debt of Anglo
Irish, et al, would bring down the entire financial edifice of Europe,
then how did any of these European banks pass their stress tests
this summer, and how did the EU authorities ever let the matter
reach this point? Brussels cannot have it both ways.

Ireland did
not run large fiscal deficits or violate the Maastricht Treaty in
the boom years. It ran a fiscal surplus, (as did Spain) and reduced
its public debt to near zero. German finance minister Wolfgang Schauble
keeps missing this basic point, but then we don’t want to disturb
a comfortable – and convenient – German prejudice.

Patrick Honohan,
the World Bank veteran brought in to clean house at the Irish Central
Bank, wrote the definitive paper on the causes of this disaster
from his perch at Trinity College Dublin in early 2009.

Entitled “What
Went Wrong In Ireland?”, it recounts how the genuine tiger
economy lost its way after the launch of the euro, and because of
the euro.

“Real
interest rates from 1998 to 2007 averaged –1pc [compared with
plus 7pc in the early 1990s],” he said.

A (positive)
interest shock of this magnitude in a vibrant fast-growing economy
was bound to stoke a massive credit and property bubble.

“Eurozone
membership certainly contributed to the property boom, and to the
deteriorating drift in wage competitiveness. To be sure, all of
these imbalances and misalignments could have happened outside EMU,
but the policy antennae had not been retuned in Ireland. Warning
signs were muted. Lacking these prompts, Irish policy-makers neglected
the basics of public finance.”

“Lengthy
success lulled policy makers into a false sense of security. Captured
by hubris, they neglected to ensure the basics, allowing a rogue
bank’s reckless expansionism,” he wrote.

Read
the rest of the article

December
1, 2010

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