Thursday, December 9, 2010

Ireland's Indentured Servitude

The people of Ireland have been impressed into a life of indentured servitude by the financial engineers of the IMF and EU to pay the debts of bankers (723 billion euro of guarantees) which were not their debts and to docilely accept their role as servile cash cows to be milked and milked to insure European banks will not suffer and the financial elite can become more wealthy.  The forced bailout of Ireland was not about Ireland's debt, it was about the Irish banks senior bond holders -- other European banks with Germany (and the German government may not know the extent) and the United Kingdom the most exposed.  Yet, countries harboring these financial predators have been reluctant to share the burden with Ireland after the ECB, in 2008, convinced the Irish government that it had to save the Irish banks at all costs and with no direct economic help.  In coercing the Irish government to make private bank debt public debt, the ECB and European (and global) financial interests turned a country with manageable debt and a current account trade surplus (except with the Untied Kingdom) into a ticking time bomb, but the bomb was not in Ireland; it is in Europe and the banks of Europe and it is still ticking.

The problem of the Irish banks was a combination of no proper risk management by the banks, a lack of regulation and politicians looking the other way, an intransigence of some eurozone members to consider a fiscal mechanism, and an inflow of foreign money, particularly from other European banks, as a result of the exchange rates established for the euro between the eurozone countries, creating a housing and construction bubble with the help of developers.  When the bubble burst, the Irish government was cajoled into saving the banks and compounding the problem with a poorly formed "bad" bad bank rather than letting the banks fail and be restructured.  Instead, they were encouraged to endow a capitalism without losses. Yet, as Iceland demonstrated, any sovereign country with its own currency has the power to protect its people and remain free.  Iceland banks saw many European investors, individual and corporate, chasing higher interest rates depositing money.  When the financial crisis of 2008 hit, liquidity froze up globally and eventually over a two week period the Icelandic banks had increasing difficulty in obtaining interbank and overnight liquidity loans.  Faced with the failure of the banks, the government of Iceland chose to let them fail, nationalized the remaining assets and devalued the krona some 80% against the euro.  The people of Iceland rejected an imposed Icesave program to indemnify foreign investors.  The only real aid was an IMF loan partially subsidized by other Scandinavian countries which Iceland has never fully drawn upon and which should be paid by 2012.  In fact, Iceland emerged from recession in Q3 of this year.  But Ireland is not Iceland, because Ireland does not have its own currency; if it were to default, it would have to leave the euro and adopt its own currency, perhaps by converting debt into legal tender during a transition period.

An IMF/EU bailout is another loss of sovereignty. The ticking time bomb ticked louder as the government discovered more toxic debt and capital needs than estimated by auditors in the the banks, as the cost of debt and swaps kept going up, as the banks liquidity problems grew with the growing lack of international confidence, as international corporate depositors withdrew money, as the Irish government poured more and more money into the banks while the ECB bought Irish bonds here and there, as subordinated bond holders were forced to share the losses and the senior bond holder's guarantees were questioned, and as other eurozone nations repeatedly voiced intentions to not help or to hinder help until Ireland had only bailout or eventual default as choices.  In continuation of Ireland's political establishment's predilection towards being the good euro partner, the challenges of default and an Icelandic type of resurrection were churlishly ignored.  Besides, pressure was building for the world to discover the real risks of all European banks.

At least the head of the Irish Central Bank tried to send a veiled message to the ECB and European banks when he said there would be no more money for the Irish banks and they were all for sale to foreigners.  He was letting them know they had a responsibility in this and they had the most to lose.

Rather than paying attention to the cost to the Irish people, international attention was focused on preserving special indemnity for the senior bond holders and the lack of international confidence exhibited in rising debt and swaps costs at any hint of bond holders sharing the burden of losses of investment.  At the same time the Irish 4 year deficit reduction budget, containing a 15 billion euro austerity program, necessary to facilitate the IMF/EU bailout of 85 billion euro, of which 35 billion would be for the Irish banks and 17.5 billion would have to be contributed from Irish pension funds, and based on an unlikely economic growth of 2.5% to 2.75% was proposed to cut child welfare, minimum wage, increase taxes including the VAT affecting families the most but not the corporate tax (a source of revenue as it encouraged foreign corporations to incorporate in Ireland), have pension funds load up on government bonds, and change pension rates and ages.  What type of world prefers to raid public pensions to protect private senior bond holders from sharing in the losses of their investments?   Ireland has even been required to post collateral for the ESFS loan. Political opposition and public discontent appears to be growing despite the budget approval. The augmented austerity package as well as current austerity program were seen as obvious drags on economic growth, which may only be .9% next year as a result of these measures, and Irish standard of living.  Despite serious rumors of bank restructuring or burden sharing by senior bond holders, there was nothing in the budget or bailout which implies any change for the banks or senior bond holders.  While eurozone countries were concerned about Irish debt and the costs of a bailout, the Irish public and the world were puzzling over the different interest rates being reported for the IMF portion, the overall bailout (5.8%), and the EFSF contribution, which must be a higher rate than the total bailout rate since the IMF rate was lower than the bailout rate.  Amid all of the planning, the very essential piece of the ESFS was being ignored, because it is not only unfunded, but as the ticking bomb ticks louder through the euro countries its funding is more precarious without the establishment of a euro bond.

The question became is Ireland solvent or is it not.  Ireland had the money to continue through at least the first half of 2011 without help.  The real problem was the suicidal guarantee of private Irish bank debt.  To me, the whole question of solvency was actually the fear it might be economically wise and beneficial for Ireland to default by restructuring debt and the banks and the risks of the European banks would be naked with potential liabilities of 2245 billion euro, if the EMU will not form a fiscal mechanism or fiscal stabilization emergency program.   Without national fiscal space, the future rollover risk of debt and perception of risk premium vulnerability not only crippled Ireland, but is a risk vulnerability of any euro nation as the eurozone has no means of absorbing asymmetric region-specific shocks.

The sad state of affairs is Ireland is not being saved because the Irish need help, but because the eurozone, in its failure to structure a fiscal mechanism and refusal to deal with the national imbalances of not having a fiscal union, has placed European banks in a position in which they are vulnerable and dependent on the international faith and confidence in the euro to support the eurozone countries.  The financial contagion of "Ireland" cannot be stopped unless the eurozone imbalances are addressed by the establishment of a fiscal mechanism consistent with a union of sovereign nations in which sovereign debt is not really sovereign.  Ireland's problem is a fiscal problem and it is a fiscal problem that grew from the private sector not the public sector.  As such it is a clear refutation of the German perspective of the euro and the eurozone.  As this euro currency crisis spreads from weak link to weak link with continued reluctant and late intervention by the eurozone and ECB, the keystone moment will be Spain and Italy, as one of the four largest EU economies, will be the death knell.  Attempts to ignore the inevitable, without fiscal action by the eurozone as a whole, by throwing blame around and putting eurozone countries in opposing camps is courting euro death.  Despite attempts to mask the debate as about beggar nation debt, the number of German banks and  European banks (there are two active lists in this link for German banks on left column and lower on the left European banks) exposed to Ireland demonstrate the interwoven systemic danger of European banking encouraged by government guarantees of debt to engage in riskier investing within a union which does not have the authority to act as a union of sovereign nations.  All it takes to turn the euro crisis around is the establishment of a fiscal mechanism, stronger bank regulation, and the commitment of the eurozone countries to a one for all and all for one loyalty.  Unfortunately, the ESFS without a euro bond is not a fiscal mechanism and the national politics of many eurozone countries are not as self sacrificing as Ireland.

The bomb is ticking and even German bonds have seen three recent auction failures.  All for one and one for all or global financial chaos.





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