The humbling of Ireland in recent weeks by its debts is one of the saddest stories on the planet. It didn’t have to happen this way, and I am still amazed in many ways that the Dublin government has allowed its control to slip away.
I’d like to pass along the view of a colleague, Ambrose Evan-Pritchard, the veteran international economics correspondent of the Guardian. He has been studying the euro and the European Union since their inception, and knows all the players and where the bodies are buried. His view of the events sounds right to me — though many readers who live in Europe are more than welcome to let me know you disagree. Here goes.
Ambrose observes that stripped to its essentials, the 85-billion euro package imposed on Ireland by the eurozone and the European Central Bank is a bailout for imprudent 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.
It is hard to justify why the Irish should pay the entire price for upholding the European banking system, and why they should accept such harsh terms.
If it is really true that a haircut on the senior debt of the Irish banks 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?
Ambrose notes that Ireland did not run large fiscal deficits or violate the Maastricht Treaty in the boom years. It ran a fiscal surplus, and reduced its public debt to near zero.
As described in a 2009 paper by Patrick Honohan, a World Bank veteran brought in to clean house at the Irish Central Bank, the Celtic Tiger economy lost its way because of the euro.
”Real interest rates from 1998 to 2007 averaged -1%, compared with plus +7% in the early 1990s,” the paper said. A positive interest shock of this magnitude in a vibrant, fast-growing economy was bound to stoke a massive credit and property bubble.
Honohan notes that eurozone membership — which brought the low rates — contributed to the property boom, and to the deterioration in wage competitiveness. Policy makers were not tuned into the danger. Warning signs were muted. Lacking market-based prompts, Irish policy-makers neglected the basics of public finance, Honohan says, allowing rogue banks to expand recklessly. Of course banks like Allied Irish, have paid a heavy price as well.
So to be sure, the Irish should have regulated their banks properly and restricted mortgages to a loan-to-value ratio of 60% to 80%, as Hong Kong and Singapore do, to prevent stupid bubbles.
But almost nobody in Dublin, Berlin, Brussels or Frankfurt understood the implications of monetary union and how it would create a lending bubble. Given this, why should the Irish people accept the draconian terms of the EU and IMF? As Citigroup said in a note today, the yield on the EU part of the loan package will come at around 7% — higher than the fee paid by Greece!
Ireland still has a strong export economy and will work hard to grow out of this jam. But this story of troubles is not yet over. The government has not yet fully agreed to EU terms, and could still ultimately tell policy leaders in Bonn and Brussels to take a hike. Iceland essentially did that by kicking its banks out of the house — refusing to extend its guarantee on the institutions’ senior debt.
There are a lot of bad choices here. Giving in to Europe’s demands will likely lead to years of austerity budgets, economic contraction and rising unemployment. Default will shut Ireland out of debt markets. Even if headlines fade for awhile, the Irish problem is not going away.