Thursday, November 18, 2010

Ireland Betrayed

As the EU auditors descend on Ireland this week to examine the Irish banks, last week had more information than could be dealt with in our Ireland posts and the forthcoming Economy & Market post for last week.

There has been a general agreement with our opinion that Germany's position on debt resolution and restructuring with respect to bondholders in future eurozone bailouts led to market disruption, but we also held the view that the ECB, EU, and the European monetary Union has not supported Ireland to the extent that Ireland played the austerity poster child and protected other European banks.  Now, there is pressure to accept a sovereign bailout rather than economic support with apparently three options on the table in the form of sovereign and bank loans, banks loans, or sovereign only loans.  The bond market rallied at the very suggestion of possible assistance.

The fact remains that Ireland proves austerity has not only failed but has made the economy worse.  The ECB and EU are reluctant to move decisively to support Ireland and sort the Irish banks out.  Given the Irish bonds based on Ireland's NAMA program to guarantee bank private debt and restructure their toxic assets and balance sheets are, by many accounts, deposited with the ECB, the ECB may not have Ireland's best interests at heart.  I, and many others, have argued in the past that the EMU lacks proper fiscal policy and coordination which significantly hobbles the member nations from exercising appropriate fiscal policy consistent with monetary policy.  For all practical purposes, the EMU does not have the structure to promote fiscal unity among sovereign nations.  What the EU and ECB do not appreciate is that Ireland is not Greece and Ireland may have more cause and reason to protect its citizens by withdrawing from the euro and renouncing and restructuring Irish bank debt.  Except for the United Kingdom, Ireland has a current account surplus. If presented with the choice of joining Iceland or Greece, the Irish people may want to have a say.

There are two significant problems to such a national course of action and one is the economic consequences of credit default swaps being paid by the international banks and the other is the Irish government is the same political party which oversaw the housing bubble and poorly regulated, and highly speculative, economic expansion which went bust in 2008.  Obviously, the opposition party has not done its job as well and has indicated it would continue guarantees on private bank senior bondholders, who are primarily European banks.  Hopes that exports could drive recovery while reducing government spending defies recognition of the reality of global trading in which exporting is global and importing is national.  The ECB has bought Irish bonds and provided liquidity loans, which alone amount to approximately 130 billion euro, to Irish banks.

Still it has become obvious from the beginning of these denied negotiations that Ireland wants nothing to do with a sovereign bailout and wants the support of the EMU and ECB as an austerity team player and equal eurozone nation.  The IMF, as I have predicted, voiced its willingness to help Ireland, which undoubtedly spurred the EU to move at a faster pace amid internal debate.  Meanwhile, the current market crisis continues to unfold as a currency crisis, despite reports this week, and last, that corporations are withdrawing funds from Irish banks.  If these are foreign corporations, that would be consistent with a currency crisis and if these are predominantly Irish corporations and individual demand deposits that would be consistent with a banking crisis, but the reports have made no attempt to distinguish which corporations are withdrawing funds.  There is little doubt the euro would be strengthened by EU and ECB support of Ireland.

Ireland deserves better leadership and the European Union and the EMU need to demonstrate support despite member nations not wanting any demonstration of fiscal union however artificially fabricated.  If the ECB refuses or fails to fully support the need to unwind the Irish government from the private bank debts and guarantees of senior bondholders of those banks, because it is not in the best interests of the ECB balance sheet or other European banks, does Ireland have cause to assert its right to protect its citizens without respect of the global economic consequences?

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