It isn’t easy being the ECB. For starters, the European Central (ECB) faces so many pesky questions: Blah blah blah bailouts. Blah blah blah we want to see the notes on deliberations. Blah blah blah Freedom of Information Requests. Blah blah blah we’re taking you to court. Etc. How is anyone supposed to have any confidence in the institution’s authority with all of these questions being bandied about?
Being the ECB does have it’s perks though. For starters, if you’re an elite institution in the ever-evolving eurozone, transparency isn’t really an issue:
ECB Withholding Secret Greek Swaps File Keeps Taxpayers in Dark
By Gabi Thesing, Elisa Martinuzzi & Alan Katz — Nov 29, 2012 6:01 PM CT
The European Central Bank’s court victory allowing it to withhold files showing how Greece used derivatives to hide its debt leaves one of the region’s most powerful institutions free from public scrutiny as it assumes even more regulatory power.
The European Union’s General Court in Luxembourg ruled yesterday that the central bank was right to keep secret documents that would reveal how much the ECB knew about the true state of Greece’s accounts before the country needed a 240 billion-euro ($311 billion) taxpayer-funded rescue.
The case brought by Bloomberg News, the first legal challenge to a refusal by the ECB to make public details of its decision-making process, comes a month before the central bank is due to take responsibility for supervising all of the euro– area’s banks. The central bank already sets narrower limits on its disclosures than its U.S. equivalent, the Federal Reserve. The court’s decision shows the ECB has too broad a discretion to reject requests for disclosure, academics and lawyers said.
“It’s a very disturbing ruling,” said Olivier Hoedeman of Corporate Europe Observatory, a Brussels-based research group that challenges lobbying powers in the EU and campaigns for the accountability of EU bodies. “It is such a sweeping, blanket statement that it undermines the right to know.”
Bloomberg sought access to two internal papers drafted for the central bank’s six-member Executive Board. The first document is entitled “The impact on government deficit and debt from off-market swaps: the Greek case.” The second reviews Titlos Plc, a structure that allowed National Bank of Greece SA, the country’s biggest lender, to borrow from the ECB by creating collateral from a securitization of swaps on Greek sovereign debt. The bank loaned 5.4 billion euros to the government.
ECB President Mario Draghi said on Oct. 4 that the ECB “is already a very transparent institution,” citing the fact that he holds a monthly press conference after its rate decision, testifies to lawmakers, gives interviews and makes speeches.
In yesterday’s decision, the court upheld the ECB’s opinion that the documents sought by Bloomberg could damage the public interest and aggravate Europe’s financial crisis.
“The ECB must be recognized as enjoying a wide discretion for the purpose of determining whether the disclosure of the documents relating to the fields covered by that exception could undermine the public interest,” the three judges said in their ruling. Exceptions “must be interpreted and applied strictly,” they said. An ECB spokeswoman said the central bank welcomed the court’s decision.
The ECB’s declaration last year that it must enjoy a “wide discretion” over what Greek bailout deliberation notes are made public due to concerns that the information might “inflame” the markets presents quite a conundrum given that such declarations tend to also inflame the public. It’s an example of why it isn’t easy being the ECB.
Anglo Irish Has Many “Interest”-ing Secrets
There are those ECB perks, however. Like the lack of any commitment to democratic accountability. It’s a perk that Greece is has been familiar with with quite a while now. Ireland also knows of this perk quite intimately. The country ended up bailing out a handful of its banks for a massive price tag in late 2010, making Ireland’s public liable for an 85 billion euro bailout. It was a fateful day for Ireland because austerity was price. It’s been a tough slog for Ireland ever since. The renegotiation of those massive bailouts has been goal ever since too. For a country the size of Ireland, the 85 billion euros bailout it had to accept after nationalizing private bank debt was a “death spiral”-league bailout. And death spirals tend to prompt questions. Pesky questions. Blah blah blah bailouts. Blah blah blah we want to see the notes on deliberations. Blah blah blah Freedom of Information Requests. Blah blah blah we’re taking you to court. Fortunately for the ECB, transparency is mostly optional:
Probe into ECB’s refusal to release secret bailout letter
GAVIN SHERIDAN and TOM LYONS – 13 January 2013
THE European Ombudsman has begun a formal investigation into the European Central Bank’s refusal to release the letter that bounced Ireland into the bailout.
Two senior executives from the Ombudsman travelled to the ECB’s headquarters in Frankfurt in December to view the letter which the bank is refusing to allow the citizens of Ireland to see.
The decision to carry out an investigation follows a complaint against the ECB of “maladministration” by journalist Gavin Sheridan. The ECB has refused to release the letter dated November 19, 2010, for over a year on the basis that it claims it is not in the “public interest” for Irish citizens to see “candid communications” between the ECB and national authorities.
This letter is marked “secret”, and its publication has been blocked at the highest levels of the ECB. The European Ombudsman asked Sheridan on Friday to provide it with any additional “observations” before making its critical decision.
The Sunday Independent and Sheridan have appealed the Department of Finance’s decision to refuse this same letter to the Information Commissioner.
In correspondence, Minister for Finance Michael Noonan urged the Sunday Independent to appeal the Department of Finance’s previous decision to refuse the release of the letter.
On doing so, other letters sent between the late Brian Lenihan and Jean-Claude Trichet were released, but the key letter of November 19, 2010, was again withheld.
That still-secret letter between Ireland’s former Minister of Finance, Brian Lenihan, and former head of the ECB Jean-Claude Trichet must hold quite a few juicy secrets. Massive, hastily approved bailouts tend to involve such things. And if the letters between Lenihan and Trichet that have been revealed so far are an indication of what we can expect those still secret letters to contain we can expect those secrets to be especially juicy. Massive, hastily approved bailouts that send nations into debt death spirals tend to involve things like juicy secrets, especially when they’re bailouts agreed to under duress:
Revealed: Full extent of Lenihan’s capitulation to Trichet and Europe
Daniel McConnell – 02 December 2012
The ECB’s hawkish boss laid down the law to a broken and hapless Finance Minister, writes Daniel McConnell
ON December 9, 2010, two days after he had delivered his final-ever Budget, Brian Lenihan was at a low ebb. As the snow fell heavily outside his Merrion Street office window and people outside slipped on the icy pavements, Lenihan, isolated, defeated and in failing health, sat in his office and formally committed Ireland to the penal terms of the bank rescue. It had been ordered by the ECB but the Irish taxpayer would pay for it.
While the overriding narrative that the innocent citizens were screwed into bailing out our toxic banks has long been rehearsed since those dark days of November 2010, for the first time today we reveal how pathetic Lenihan’s capitulation really was.
THE DECEMBER 9, 2010, LETTER
On that cold December day, following rounds and rounds of bruising meetings and negotiations, Lenihan wrote to the head of the European Central Bank, Jean-Claude Trichet, committing the Irish taxpayer to whatever future bailout of Irish banks would have to take place.
Today, for the first time, we reveal the contents of that letter, which has finally been released to the Sunday Independent and Gavin Sheridan, journalist with thestory.ie, under the Freedom of Information Act – two years after the fact.
Beaten and weary, Lenihan had had no success with his argument that Ireland, by issuing the blanket bank guarantee in September 2008, had come to the rescue of Europe and that – given Ireland’s woes – Europe should now meet some of the cost of that bailout.
Trichet was not for turning. Only five weeks earlier, he had bullied the Finance Minister into the €85bn Troika bailout and he was not about to give an inch on sharing the burden of fixing the broken Irish banking system.
Lenihan’s commitment, contained in the letter, that “any additional capital requirements for restructuring Anglo Irish Bank and Irish Nationwide must be covered with cash injections by the Government”, along with a similar promise for the other “viable banks”, ultimately cost the Irish taxpayer €24bn, as revealed by his successor, Michael Noonan, in late March 2011.
An initial reading of the letter would suggest that this was the Irish minister acting off his own steam, affirming commitments to the troika, when, in truth, the penal commitments signed up to by Lenihan had been agreed following intense dialogue over several weeks.
They illustrate how poorly the Irish team performed in those negotiations.
“The Irish authorities agree the following additional clarification regarding the implementation of the measures agreed [with the troika],” Lenihan wrote.
Paranoid about the impact this letter would have on the financial stability of the Irish State, Lenihan said it was not possible to make the contents of the letter public for fear that it would undermine government authority.
“These clarifications are being provided in respect of a limited number of specific issues, which it is not possible to disclose publicly on account of legal risks, commercial, market and financial-stability considerations, which would undermine the authorities’ ability to implement those measures or render them more costly,” he wrote.
That is certainly some serious but understandable paranoia: Ireland’s Minister of Finance Brian Lenihan was basically forced to agree to terms that would blatantly undermine the long-term solvency of the entire nation. Pretty much any info that you disclose regarding such deals tend to be unhelpful for shoring up market “confidence”, and that would result in a rise in interest rate costs and the overall long-term costs of any such bailout. It’s a problem.
Public disclosure, it’s often argued, can disrupt the free exchange of ideas. But the particular situation where disclosure of information about the rational and negotiations that went into the development of a policy would damage the public by revealing just how damaging the initial policy rational is can become a particularly acute problem. Especially when the policies involve banker bailouts paid for by public austerity.
It also doesn’t help when the “bailout” is really an international loan to a small nation to finance the bailout of foreign private bank bondholders. A relatively high-interest loan.
WHAT THIS LETTER MEANS
The most telling aspect of this letter is that it placed the future burden of bank bailouts on the Irish taxpayer – without any reference to any European institution or bank sharing any of the burden.
This is despite the latter’s continued gamble on Ireland during the boom.
Lenihan, on the direct orders of Jean-Claude Trichet – and despite having saved Europe in 2008 by not allowing Anglo or Irish Nationwide to go to the wall – was at this point in 2010 having to accept the full cost of any future bailout. We later found out that this would be €24bn.
We know from Finance Minister Michael Noonan in early September that Lenihan was directly threatened by Trichet by way of letter that unless Ireland went into a bailout emergency funding from the ECB would be cut off.
Noonan said he had seen the “very direct” letter, which left Mr Lenihan with “little or no option” but to admit defeat.
Since leaving his post, Trichet has also insisted that this letter should remain confidential and not be released, despite the clamour in Ireland for its public disclosure. But whatever the contents of that letter, the contents of what we are publishing today represent the strongest supporting evidence as to why Ireland deserves a deal on its debt.
Following on from Greece’s major debt-reduction deal last week – which amounts to its third default in less than 18 months – time is running out for Noonan and the Government to deliver a major debt reduction. Many are asking what does Greece have that Ireland doesn’t?
While Ireland continues to “bump along the bottom,” the greatest obstacle to growth is the size of our debt. If we can get a deal, then Ireland’s chances of recovery are strong. But if we don’t, then we will be lost for over a decade.
The poor poor ECB. There’s just one particular still-secret 2010 letter where former ECB chief Jean-Claude Trichet directly threatens Ireland’s finance minister that the ECB’s emergency funding to Ireland will get cut off unless Lenihan agrees to bailout terms that places the entire burden of the privatized Irish bank debt on the Irish tax payer without any sort of assistance from Ireland’s much larger eurozone partner. And that pesky public still wants to see that letter even though the ECB and Irish government has released all sort of other documents that clearly indicate that Ireland was given no choice and ordered to accept a deal that was blatantly against the Irish public’s interest and greatly in the interests of foreign private bank creditors. Why can’t the public simply understand that if the Anglo Irish bailout letters were to be made public, that will discredit the Irish government and the ECB, complicating the recent Anglo Irish bailout renegotiations? Why can’t the public just have confidence, without any of the information required to justify that confidence? A lil’ faith in the ECB never hurt anyone.
Information Can Be Dangerous, Past and Present
And please no questions about about that recent renegotation...the details about an ongoing Anglo Irish debt bailout renegotiation could apparently undermine the entire European financial system. And the interest payments on that Ango Irish bailout debt are just starting to kick in this year so renegotations are urgent. So please, no questions. Bad things will happen:
ECB refuses to discuss talks on promissory notes
Friday, January 18, 2013
As Irish officials continue to insist there is an imminent deal on the Anglo Irish promissory notes the ECB is claiming that releasing or even commenting on any details of a deal would undermine the entire European financial system.
By Vincent Ryan
In response to a freedom of information request from the Irish Examiner for documents in relation to the ongoing negotiations between the ECB and the Irish authorities. the director general of the ECB secretariat, Pierre van der Hagen, said they could not go beyond acknowledging that negotiations are in train.
“Documents relating to the on going developments surrounding the Anglo Irish promissory notes cannot be disclosed, as even partial disclosure would undermine the protection of the public interest as regards monetary policy of the union and the financial or economic policy of Ireland, and the stability of the financial system in the union and in Ireland.” he said.
The structuring of the deal on the Anglo Irish promissory notes by the previous government means that interest payments would only come into effect from this year. The Taoiseach Enda Kenny has been pushing to try and get a deal on the promissory notes before crippling interest payments kick in, which threaten to derail Ireland’s recovery.
However, Sinn Féin’s finance spokesperson, Pearse Doherty, said it was very much in the public interest that the status of the negotiations be revealed so that the fudge that was orchestrated last year in relation to the payment of the €3.1bn is not repeated.
“We’re less than three months to this note being paid. We went through the same rigmarole last year and it transpired no deal had been achieved. It’s very much in the public interest to know what, if any, negotiations are ongoing and we deserve to be kept informed and for the process to be more transparent,” he said.
The renegotation of that 2010 bailout of Ireland — a bailout necessitated by the 2008 bailout of Anglo Irish and a handful of other major property lenders — has been a major public issue in Ireland for the past couple of years. Last October, Angela Merkel freaked out Ireland by taking a hardline stance against a renegotiation of that crippling bank debt. But everyone also knew that it’s pretty much a given that Ireland’s massive bank debt will somehow be renegotiated to a less onerous level at some point. It’s just absurdly high for a country the size of Ireland. And sure enough, in early last month some debt was indeed renegotiated: The 2008 bailout of Anglo Irish bank, the largest of the Irish property lenders, was scheduled to cost Ireland 47 billion euros over the next 20 years, with 3.1 billion to be paid each year until 2023 and interest payments enough to increase the deficit by a full pergentage. Anglo Irish’s debt repayments were guaranteed to be an albatross hanging around Ireland’s neck for a long time. And the interest on the debt was due to start this year. Things were not looking good for those institutions charged with healing Ireland’s economy or the entire “austerity first” model that the eurozone appears to be developing would be put into question. Ireland is considered one of the relative “success” stories in the eurozone. Somehow that debt burden had to be reduced.
So there was eventually a renegotiation of that Anglo Irish debt. The overall debt wasn’t forgiven, of course. That’s not how the ECB rolls. Instead, the payback period got pushed back 25 years so principle repayment can start in 2038 instead. There will still be interest payments in the interim, but 25 years of inflation (plus interest) should make the crushing nationalized private bank debt somewhat less crushing:
Ireland hails historic debt deal with ECB
By Padraic Halpin and Carmel Crimmins
DUBLIN | Thu Feb 7, 2013 2:14pm EST
(Reuters) — Ireland clinched a long-awaited deal on Thursday to ease the burden of its bank debts, sending its borrowing costs falling to pre-crisis levels and bolstering its chances of ending its reliance on EU-IMF loans this year.
After nearly 18 months of negotiation, Prime Minister Enda Kenny won European Central Bank (ECB) approval to stretch out the cost of bailing out Anglo Irish Bank, slicing billions off the country’s borrowing needs and cutting its budget deficit.
“Today’s outcome is an historic step on the road to economic recovery,” Kenny told a packed parliament in Dublin. “It secures the future financial position of the state.”
The assent of the ECB is a major coup for Kenny, who was forced to call an emergency session of parliament last night to liquidate Anglo Irish, a lender whose casino-style attitude to risk helped precipitate the country’s financial implosion.
“It certainly is unusual in the history of the crisis that we are actually being surprised in a positive way by the scale of the response,” said Austin Hughes, chief economist at KBC Bank. “Normally we have seen underachievement and overpromising.
“The early indications are that this will make a material difference for the outlook on the Irish economy.”
The agreement stretches the cost of bailing out Anglo Irish over 40 years rather than ten and cuts Ireland’s borrowing needs by 20 billion euros over the next decade.
It also gives the government another 1 billion euros to work with in forthcoming budgets.
Technical talks between the ECB and Irish officials had been bogged down by ECB concerns that any deal given to Dublin to ease the 48 billion euros cost of the Anglo promissory notes could set a precedent for other countries, such as Spain, which are also dealing with large bank debts.
But with European leaders keen to offer a success story from the region’s debt crisis to encourage both voters and potential investors, Dublin went back to the drawing board.
In addition to Merkel’s fears that the Irish debt renegotiations would set a precedent that could be applied to other nations receiving their own forms of “special” treatment, there was also a great deal of concern amongst Merkel’s far-right CSU allies that the easing of debt burdens would slow down the pace of “structural reforms”(austerity). Trickle down kindness is apparently bad for business whereas promoting nationally-stratified income inequality is apparently a strategic objective for achieving greater economic harmonization.
The new deal was designed so that the ECB did not have to vote on it, enabling ECB President Mario Draghi to say simply that the Governing Council had simply “taken note” of Dublin’s plan.
“It is positive for funding, and therefore increases Ireland’s chances of leaving its (EU-IMF) loan program and relying more heavily on the capital markets for funding toward the end of this year,” said Fergus McCormick, head of sovereign ratings at DBRS ratings agency.
“However, the swap itself will not affect our A (low) rating or negative trend on Ireland, because swapping the promissory notes for a bond does not reduce the stock of public debt.”
Under the terms of the deal, first reported by Reuters on Wednesday, Anglo’s promissory notes, with an average maturity of between seven and eight years, will be exchanged for government bonds with an average maturity of over 34 years. The first principal repayment will be made in 2038 and the last in 2053.
The finance spokesman for the opposition Sinn Fein party said the agreement would burden future generations.
“This week my youngest son began to crawl. He wasn’t even born at the time the promissory note was issued, yet he’ll be 40 years of age and this state will be paying back the toxic debts of Anglo Irish Bank,” Pearse Doherty told parliament.
Anglo Irish’s near-collapse in 2008 pressured the government into guaranteeing the entire financial sector, sucking it into a downward spiral and in late 2010, a 67.5-billion euro loan from the EU and IMF.
The poor ECB. First people are saying “hey, this nationalized private debt was absurd, we need to renegotiate”, and then when the ECB signs off on a renegotiated deal people are like “OMG, my infant children will be paying for this debt when they’re in their 40s”, and now people want to know how the details about this new deal too! It isn’t easy being the ECB. So many questions. So few answers that won’t inflame the public and disrupt the integrity of the financial markets:
ECB claims its ‘space to think’ supersedes public interest
Tuesday, February 19, 2013
The ECB claims that maintaining its own “space to think”, is of more importance than citizens’ right to understand how it arrives at decisions that materially affect people’s quality of life.
By Vincent Ryan
In response to an appeal over the ECB’s refusal to release documents relating to the deal the Government struck on the Anglo Irish Bank promissory note, the bank explained that it believed its refusal to release the information was in the public’s own interest.
The president of the ECB, Mario Draghi, responded in writing, claiming that any disclosure could undermine the ECB’s ability to operate.
“The ECB considers that releasing these documents would undermine the possibility of the ECB’s staff freely submit uncensored advice to the ECB’s decision-making bodies, and that it would thus limit the ECB’s ‘space to think’.
“It is, therefore, in the public interest to protect the internal consultations and deliberations,” said Mr Draghi.
Despite the fact that the renegotiation of the promissory notes will have a long-term effect on Ireland’s budget and consequently on the financial prospects of all Irish citizens, Mr Draghi believes that there is nothing in the discussion documents that led to the liquidation of IBRC, the termination of 800 jobs in the bank and knock-on effect that is expected to impact another 30,000 jobs, that are of “public interest.”
“On the basis of the content of these documents, there is no overriding public interest which could justify their disclosure and it is not possible to grant partial access to them without undermining the interest protected,” he said.
The ECB isn’t the Only Institution it isn’t Easy to Be
Pity the poor ECB. They are forced to know those dark truths that would drive the public mad with rage. Dark truths like what
orders “advice” the ECB gave Ireland’s Minister of Finance Brian Lenihan regarding the renegotiation of Anglo Irish Bank’s debt. Shudder the thought. After all, if the public was allowed to see the reasoning used to justify their leaders’ decisions on key affairs of the state, the public might, you know, start asking more questions. Questions like, “hey, what were you thinking?” or “didn’t you realize this would destroy the country?” Unpleasant questions.
That poor poor ECB. And the ECB isn’t the only institution it’s not easy to be
EU not to blame for austerity, says Jose Manuel Barroso
European Commission President Jose Manuel Barroso has denied that the European Union was behind the tough austerity measures that have swept the continent in recent years.
5:03PM GMT 10 Jan 2013
“I know many parts of our societies attribute the current difficulties to European Union level and this is not fair because it was not the European Union that created the problems,” Mr Barroso told reporters at Dublin Castle.
Mr Barroso was speaking at a joint press conference with Irish Prime Minister Enda Kenny in Dublin to coincide with the beginning of Ireland’s tenure of the six-month rotating EU presidency, AFP reported.
“I want to make this clear because there is a myth that it is the European Union that imposes difficult policies. It’s not true,” Mr Barroso said.
“The cause of the difficulties some countries are facing is excessive public debt created by national governments and irresponsible financial behaviour, that also accumulated excessive private debt including financial bubbles that happened under the responsibility of national supervisors,” he added.
“This is why now countries have to make painful adjustments. Britain is having a very tough budget and Britain is not a member of the euro.”
Mr Barroso praised the efforts of Ireland, which hopes to become the first eurozone nation to exit a bailout programme this year after years of painful austerity measures.
“I do believe Ireland can send a message of hope to other countries about what can actually be achieved,” Mr Kenny said.
Yes, earlier this year, European Commission president Manuel Barroso blamed Ireland’s financial implosion — which was caused by a giant financial bubble that was heavily financed by foreign banks — entirely on Ireland’s government for its lax financial regulations. The ability to make statements worthy of mockery without actually getting mocked is another EU-elite perk. Ireland, afterall, was routinely hailed as the “Celtic Tiger” and “darling” of the investment community and a model for the rest Europe precisely because of those policies. In fact, not too long ago (2005-ish), Ireland was part of a coalition of the new ‘dynamic’(deregulated) economies that were threatening to overthrow the old Franco/German order that had dominated Europe’s affairs for so long(it’s mostly just a German order nowadays).
Mr. Barroso most likely recalls these facts, just as he probably recalls that, somehow, the normal process of making the big foreign lenders to private Irish banks take a big “hair cut” when the bubble burst somehow didn’t apply to Ireland. Ireland was a “special case”, we recall. Recall of memories when you are representing an international institution, however, is often an option when its regarding a “special case”. “Special cases” are often what happens when lots of “special interest” are at stake and international institutions tend to involve quite a few special interests. Being the EU or the ECB isn’t easy, but it has its special perks:
When Irish Eyes Are Crying
First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage?
By Michael Lewis
When I flew to Dublin in early November, the Irish government was busy helping the Irish people come to terms with their loss. It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. To get some sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank. As the sum total of loans made by Anglo Irish, most of it to Irish property developers, was only 72 billion euros, the bank had lost nearly half of every dollar it invested.
Just take a moment and think about the size of this 34 billion euro bailout for the Irish public (for a single bank): In terms of US dollars, that would be around $3.4 trillion. That ain’t chump change.
Yet when I arrived, in early November 2010, Irish politics had a frozen-in-time quality to it. In Iceland, the business-friendly conservative party had been quickly tossed out of power, and the women booted the alpha males out of the banks and government. (Iceland’s new prime minister is a lesbian.) In Greece the business-friendly conservative party was also given the heave-ho, and the new government is attempting to create a sense of collective purpose, or at any rate persuade the citizens to quit cheating on their taxes. (The new Greek prime minister is not merely upstanding, but barely Greek.) Ireland was the first European country to watch its entire banking system fail, and yet its business-friendly conservative party, Fianna Fáil (pronounced “Feena Foil”), would remain in office into 2011. There’s been no Tea Party movement, no Glenn Beck, no serious protests of any kind. The most obvious change in the country’s politics has been the role played by foreigners. The Irish government and Irish banks are crawling with American investment bankers and Australian management consultants and faceless Euro-officials, referred to inside the Department of Finance simply as “the Germans.” Walk the streets at night and, through restaurant windows, you see important-looking men in suits, dining alone, studying important-looking papers. In some new and strange way Dublin is now an occupied city: Hanoi, circa 1950. “The problem with Ireland is that you’re not allowed to work with Irish people anymore,” I was told by an Irish property developer, who was finding it difficult to escape the hundreds of millions of euros in debt he owed.
What has occurred in Ireland since then is without precedent in economic history. By the start of the new millennium, the Irish poverty rate was under 6 percent and by 2006 Ireland was one of the richest countries in the world. How did that happen? A bright young Irishman who got himself hired by Bear Stearns in the late 1990s and went off to New York or London for five years returned feeling poor. For the better part of a decade there has been quicker money to be made in Irish real estate than in investment banking. How did that happen?
The Harvard demographers admitted their theory explained only part of what had happened. At the bottom of the success of the Irish there remains, even now, some mystery. “It appeared like a miraculous beast materializing in a forest clearing,” writes the pre-eminent Irish historian R. F. Foster, “and economists are still not entirely sure why.” Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They had gone from being abnormally poor to being abnormally rich, without pausing to experience normality. When, in the early 2000s, the financial markets began to offer virtually unlimited credit to all comers—when nations were let into the dark room with the pile of money and asked what they would like to do with it—the Irish were already in a peculiarly vulnerable state of mind. They’d spent the better part of a decade under something very like a magic spell.
Make a special note of this part of the article. It summarizes a BIG part of why the entire eurozone crisis took place:
“When, in the early 2000s, the financial markets began to offer virtually unlimited credit to all comers—when nations were let into the dark room with the pile of money and asked what they would like to do with it...”
Skipping down in the article...
True Love’s First Kiss
Morgan Kelly is a professor of economics at University College Dublin, but he did not, until recently, view it as his business to think much about the economy under his nose. He had written a handful of highly regarded academic papers on topics (such as “The Economic Impact of the Little Ice Age”) considered abstruse even by academic economists. “I only stumbled on this catastrophe by accident,” he says. “I had never been interested in the Irish economy. The Irish economy is tiny and boring.” Kelly saw house prices rising madly and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn’t trouble them. And they troubled him. “Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!” he says. “They were now all bank economists, and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’ ”
The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that, if his former students were cast on Irish TV as financial experts, something was amiss. “I just started Googling things,” he says.
Googling things, Kelly learned that more than a fifth of the Irish workforce was employed building houses. The Irish construction industry had swollen to become nearly a quarter of the country’s G.D.P.—compared with less than 10 percent in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had almost 15 times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in 25 years, three times as rich as the United States. (“A price/earning ratio above Google’s,” as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled, and the economy had been consumed with building houses and offices and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.”
The endless flow of cheap foreign money had teased a new trait out of a nation. “We are sort of a hard, pessimistic people,” says Kelly. “We don’t look on the bright side.” Yet, since the year 2000, a lot of people had behaved as if each day would be sunnier than the last. The Irish had discovered optimism.
Again, note the reality of the “endless flow of cheap foreign money” into Ireland via the purchase of bonds issued by the big Irish property lenders. It’s a critical point in understanding both how Ireland’s housing/credit bubble grew as big as it did and why there are so many foreign interests that are interested in seeing that money paid back in full. Also note that bondholders normally absorb some losses when their lendees go bankrupt, so it’s not as if it’s normal for bondholders to get paid back in full when a bank goes bankrupt.
What the crazy egghead came up with next was the obvious link between Irish real-estate prices and Irish banks. After all, the vast majority of the construction was being funded by Irish banks. If the real-estate market collapsed, they would be on the hook for the losses. “I eventually figured out what was going on,” says Kelly. “The average value and number of new mortgages peaked in summer 2006. But lending standards were clearly falling after this.” The banks continued to make worse loans, but people borrowing the money to buy houses were growing wary. “What was happening,” says Kelly, “is that a lot of people were getting cold feet.” The consequences for Irish banks—and the economy—of the inevitable shift in market sentiment would be catastrophic. The banks’ losses would lead them to slash their lending to actually useful businesses. Irish citizens in hock to their banks would cease to spend. And, perhaps worst of all, new construction, on which the entire economy was now premised, would cease.
As the scope of the Irish losses has grown clearer, private investors have been less and less willing to leave even overnight deposits in Irish banks and are completely uninterested in buying longer-term bonds. The European Central Bank has quietly filled the void: one of the most closely watched numbers in Europe has been the amount the E.C.B. has loaned to the Irish banks. In late 2007, when the markets were still suspending disbelief, the banks borrowed 6.5 billion euros. By December of 2008 the number had jumped to 45 billion. As Burton spoke to me, the number was still rising from a new high of 86 billion. That is, the Irish banks have borrowed 86 billion euros from the European Central Bank to repay private creditors. In September 2010 the last big chunk of money the Irish banks owed the bondholders, 26 billion euros, came due. Once the bondholders were paid off in full, a window of opportunity for the Irish government closed. A default of the banks now would be a default not to private investors but a bill presented directly to European governments. This, by the way, is why there are so many important-looking foreigners in Dublin, dining alone at night. They’re here to make sure someone gets his money back.
Most of the remaining article excerpt describes how the ECB ended up lending so much money to the nationalized big property lenders in the first place. It’s a LONG but very informative article so it’s well worth reading.
When the shit hit the fan in September 2008 following the collapse of Lehman Brothers, the growing problems of the big Irish propery lenders like Anglo-Irish hit a crisis point and that threatened the entire Irish economy because so much of it had become dependent on the housing construction boom. So the government nationalizes three of the biggest banks and guarantees the liabilities for the rest of the banks in an attempt to shore up confidence and save the entire system. This would, in “theory”, also save the entire housing-related sector of the Irish economy because those big lenders were such an integral part of the Irish housing sector and they were no longer going to be able to lend if they went bust. So if the Irish public assumed the full liabilities — for both the deposits held by the banks and bonds issued by the banks — the banks would no longer be in trouble and the housing sector could be saved. Once again, that was the “theory” behind the nationalization.
This theory was arrived at by the Merrill Lynch analysts that the Irish government hired to provide recommendations. Merrill Lynch was also a major underwriter of the bonds issued by these banks. Perhaps unsurprisingly, Merrill Lynch’s advise turned out to be great for those bond holders and disastrous to nearly everyone else. Forcing the Irish public to assume such a massive liability made a national default suddenly a possibility. Ireland was facing a bursting housing bubble before, but after the nationalization it faced a bursting housing bubble and the massive liabilities of those lenders that financed that housing bubble. And if Ireland went bankrupt the big bank’s creditors were still at risk.
So the markets got spooked regardless of the nationalization/guarantee scheme and the nationalized banks soon had to start borrowing billions from the ECB to pay back the private senior bondholders 100%. It turns out most of those bondholders were French and German banks and financial institutions. And Goldman Sachs. By November, 2010 the ~85 billion euros in bonds was paid back to the private creditors and Ireland requested an 85 billion euro bailout.
**End Spoiler alert**
Debt Nationalization + Austerity: The Drug-Drug Interaction-Inducement Protocol for Economic Witch Doctors
And, of course, when Manuel Barroso tells his Irish audiences not to blame the EU for the austerity strangling Ireland’s economy, he also forgets that the 85 billion euro public bailout of the private debt of three banks — like Anglo Irish’s debt -came with EU-strings attached:
Ireland Unveils Austerity Plan to Help Secure Bailout
By LIZ ALDERMAN
Published: November 24, 2010
DUBLIN — Acting to secure a $114 billion international bailout, the Irish government announced plans on Wednesday for steep tax increases and sharp cutbacks in its social welfare state.
The austerity measures, which would slash public spending by $20 billion over four years, would help pay for a severe banking crisis that hasp depleted the country’s finances and led to a dramatic weakening in the government that is likely to see Prime Minister Brian Cowen ousted from office early next year. A crucial, separate 2011 budget is to come to a vote on Dec. 7.
A throng of protesters shouted outside the Finance Ministry as Mr. Cowen and Finance Minister Brian Lenihan unveiled details of how the government planned to slash the deficit to 3 percent of domestic gross product in 2014, from 32 percent. Details of the plan were released as the government prepared to effectively nationalize two troubled banks that have bled the state of money, and as Standard & Poor’s lowered Ireland’s credit rating, citing concerns about how much the government was borrowing and about the vast amounts needed to shore up the country’s banking system.
In a speech Wednesday afternoon aimed at bolstering national morale, Mr. Cowen urged Ireland to “pull together as a people to confront this challenge, and do so in a united way.” He said the four-year plan would raise money mainly by taxing those who earned more, while going easier on those who had less. But he also warned that the “size of the crisis means no one can be sheltered.”
The International Monetary Fund and Ireland’s partners in the European Union insisted on an austerity budget as a condition for the $114 billion bailout, money that Ireland badly needs after it intervened to rescue its banks.
During the economic boom years before 2008, Irish banks borrowed cheaply and pumped out loans on houses and construction projects, helping to fuel an American-style housing bubble that went bust, ravaging their balance sheets.
The austerity plan calls for cuts of nearly 15 percent in Ireland’s social welfare budget, one of Europe’s most generous, saving $4 billion a year. Some 24,750 public jobs — a huge number in a country of about 4 million people — would be eliminated, cutting state payrolls down to about what they were in 2005 and saving about $1.6 billion a year. Child benefits and other social welfare payments would be reduced, and the nation’s minimum wage, now 8.65 euros, or $11.59, an hour, would be cut by 1 euro, or about $1.34, in the hope of promoting job creation.
Mr. Cowen said the sagging economy could recover only if Ireland proved it was cleaning up its act. “Without putting public finances on a sustainable basis, we can’t have confidence from investors to create jobs in Ireland,” he said. He predicted that the deficit reduction plan would help lower unemployment to less than 10 percent, from 13.4 percent currently, within four years.
While voters were angry about the crisis, there was also an acknowledgment that the boom years fueled too many excesses, which must now be reined in. “In a bubble, things get distorted, and after it collapses you need to rebalance the economy,” said Philip R. Lane, a professor of international macroeconomics at Trinity College. “So this plan is not really radically shifting the nature of the welfare state, it’s just returning it to what it was before the crisis.”
Under the measures, Ireland’s tax net would be widened to take in some low-income workers who currently pay no tax, and a series of new taxes would be imposed on certain residential properties, as well as on 120,000 people who receive public sector pensions.
The government also plans to cut spending on health care by over $1.9 billion through measures that are likely to push up the cost of private health insurance.
Capital spending on education will rise, but education programs will nonetheless take a hit starting next year, as more than $66.7 million is cut from the four-year budget. Classroom sizes may also grow if educators cannot find ways to reduce teacher payrolls.
Thousands of young Irish, along with people who have been shut out of the job market, are swelling the ranks of Ireland’s university students as they ride out a difficult economy.
Still, the austerity plan does not touch Ireland’s low corporate tax rate of 12.5 percent, which has helped to lure companies like Microsoft, Intel and Pfizer to set up operations in the country.
Though the country’s political parties are bitterly divided over many aspects of economic policy, they all agree that the low corporate tax rate is one of the few pillars that can allow Ireland to return to economic health. Multinational companies employ about one out of seven working people in Ireland, and their businesses are stoking export growth, even as the latest austerity program is expected to depress consumer demand and touch off a wave of retrenchment and job losses.
The Irish government clearly made a massive blunder in September 2008 when it decided to guarantee the banks’ bonds that were directly tied to a souring property market. A credible maneuver like that would, at a minimum, require a nation that had it’s own central bank and the ability to issue its own currency given the scale of the assumed liabilities. Plus, we had the ECB give Ireland a “bailout” (in the form of a high-interest loan) while simultaneously demanding that new economy-strangling mass austerity policies (and while corporate taxes remained at a low 12.5%). It isn’t easy being the ECB or the EU, but it could be worse...like being their socioeconomic guinea pig. When crappy theory is translated into reality, it tends to become a crappy reality. A lot of guinea pigs experience a lot of crappy realities.
The Confidence Fairies Want Clarity, Even If it’s Clearly Bad
The theory behind the EU/ECB’s policy mandate is the the same theory behind most modern austerity-drives. It’s the “Confidence Fairy” theory: If a nation can prove to the world that it has suddenly become more “productive” by cutting costs (usually in the form of layoffs and wage cuts), the world’s investors will suddenly become so confident about the future prospects of the troubled nation that they’ll flood the nation with new investments and the economic troubles will solve themselves. Yes, there will be a negative impact on the economy from all the austerity measures, but that impact will only be felt in the short-term because investors will be so filled with austerity-induced confidence that they’ll take the plunge anyways and make the required volume of investments necessary to overwhelm the austerity-induced economic downward spiral.
At least, that’s how it’s supposed to happen in theory. It may not be a particularly compelling theory, espcially when it involves bankrupting a nation and triggering an austerity-induced downward spiral to pay back foreign bank bond speculators. And there may not be any actual evidence that it’s working. But the “Confidence Fairy” theory that underlines the push for austerity is still a surprisingly popular one amongst key decision-makers, although that hasn’t always been the case:
We got it wrong on austerity and made things worse — IMF
By Claire Murphy
Tuesday October 09 2012
THE IMF has held up its hands and admitted it got it wrong when calculating the effects of austerity in Ireland.
The organisation said that it completely underestimated how the Irish economy would perform under strict spending rules.
The International Monetary Fund (IMF) said in an academic report that it believed for every €100 of austerity through higher taxes and spending cuts — this would impact €50 in terms of growth and unemployment.
However, the real effect meant that the austerity cut €90 to €150 out of the system.
The admission is likely to make Finance Minister Michael Noonan’s job far more difficult ahead of yet another austerity budget in December.
The IMF said there was an overall drop in incomes due mainly to increases in taxes and austerity measures in Ireland.
This ultimately served to push up poverty levels and squeeze the middle class.
“As the crisis deepened and fiscal consolidation intensified, income inequality started to widen,” the IMF said.
“The magnitude of the economic slowdown in Ireland during the crisis inevitably worsened the country’s poverty and inequality.
“In the early stage of the crisis, inequality in Ireland fell as upper income groups suffered major income losses.
“However, the impact quickly spilled over to the middle income group, with its large share of construction workers who lost their jobs.
“Ireland’s strong social support system has cushioned the impact of the crisis on its at-risk-of-poverty indicators compared to the rest of Europe,” it added.
It isn’t easy being the ECB, the EU, or the IMF separately given the scope of their domains. When they join together to form the ol’ Troika o’ Doom things become even harder. The Troika o’ Doom only has one weapon and that’s austerity, and austerity tends to piss people off more than pretty much anything else. It’s the the drone warfare of international economic policy: Because it can be used any time unsustainable debts are involved(or sustainable but temporarily scary debts), austerity has an extremely large potential theater of operation. But it’s also kind of creepy and inhumane with lots of potential for collateral damage so it tends to really piss off the locals wherever its used.
At least we can credit one third of the Troika o’ Doom, the IMF, with finally recognizing that austerity hasn’t really worked the way they predicted and suggesting a change in policy. Although then they changed their mind after about 10 days. The ability to change one’s mind about critical policy matter when it becomes clear that it’s really going to piss large swaths of the public may not be a very sustainable perk, but it’s a very handy one:
IMF says pace of Irish austerity remains appropriate
DUBLIN | Sat Oct 20, 2012 10:48am EDT
(Reuters) — The International Monetary Fund (IMF) said on Saturday that the pace of austerity prescribed in Ireland’s bailout program is appropriate and that a number of other factors have also proven to be a drag on growth.
The IMF, one of a trio of lenders overseeing Ireland’s 85 billion euro bailout, said it was restating its position in response to media queries regarding its research on the impact of fiscal adjustment on economic growth.
The IMF issued a similar statement in relation to fellow bailout recipient Portugal last week, urging it to continue a tough budget adjustment that was imperative for the country to return to finance itself in debt markets.
“The pace of consolidation under the program has struck an appropriate balance and continues to do so for the period ahead, enabling Ireland to make steady progress,” Ajai Chopra, the IMF’s deputy director for Europe said in a statement.
The IMF, European Commission and European Central Bank, Ireland’s so-called troika of lenders, will give their latest quarterly bailout assessment next week with few issues foreseen in a period when Ireland resumed borrowing on long-term bond markets and continued to meet its program targets.
Fortunately, the IMF revised its re-revision on the benefits of austerity back towards a more humane stance just a couple of months later. It just wants to see one more year of austerity and if that doesn’t work the country can drop the austerity regime...for one year:
IMF agrees more aid for Ireland and urges easing of austerity
Ireland should defer additional austerity budgets until 2015 if the bailed-out country misses its economic targets next year, the IMF said.
By Denise Roland, and agencies
8:12AM GMT 18 Dec 2012
The International Monetary Fund authorised the release of €890m (£746m) on Monday, the latest batch of an €85bn EU-IMF bailout programme entered in 2010 after the country’s economy collapsed.
Its statement follows a raft of new taxes and spending cuts introduced by finance minister Michael Noonan in the country’s sixth straight austerity budget, which targeted €3.5bn in spending cuts and new taxes.
The 2013 budget, announced on December 6, hit child benefits, imposed higher taxes on pensioner incomes, and introduced new levies on properties, provoking protests outside the Irish parliament buildings.
David Lipton, First Deputy Managing Director of the IMF, said Dublin had strongly implemented the programme and had hit all its targets.
“This baseline outlook is subject to significant risks from any further weakening of growth in Ireland’s trading partners, while the gradual revival of domestic demand could be impeded by high private debts, drag from fiscal consolidation, and banks’ still limited ability to lend,” he said in a statement.
“Nonetheless, if next year’s growth were to disappoint, any additional fiscal consolidation should be deferred to 2015 to protect the recovery,” he added.
Mr Lipton said Ireland’s market access would also be greatly enhanced by “forceful delivery of European pledges” to improve the sustainability of the programme, especially by “breaking the vicious circle between the Irish sovereign and the banks”.
Ireland aims to end its bailout programme next year having already revised down its post-bailout borrowing needs by €10bn through a limited bond market return this year, a move the country’s debt agency plan to repeat this year to cover its 2014 funding requirements.
The Irish government is seeking to transfer the public debt used to rescue Irish banks to the new eurozone bailout fund, the European Stability Mechanism (ESM), but so far EU leaders have failed to sanction such a deal.
A Return to the New Normal Of Austerity Clarity
As noted in the above excerpt, there are plans to actually end Ireland’s special direct financing and return it to the normal financial markets in 2013. To some extent this return to “normalcy” in 2013 isn’t really an option because the 85 billion euro bailout that has been financing Ireland since the 2010 deal is scheduled to run out next year. It’s very unclear whether or not Ireland will be able to avoid requiring a second bailout just keep itself running given the linger damage from the bubble coupled with the massive austerity damage done to its economy. The viability of a post-austerity Ireland remains to be seen. But that uncertain future hasn’t prevented the issuance of awards for bold leadership on this front, like the “Golden Victoria” Prize for European of the Year that Angela Merkel awarded Irish Prime Minister Enda Kenny last year on behalf of a Germany magazine publishers. Yep. Ireland also got its “special terms” during this period early last year. It’s part of what led to the expectation that there would be a renegotiation of the Anglo Irish debt in the first place. Handing out trophies for successfully imposing austerity on a nation that just experienced a financial bubble and then bailed out your nation’s banks that fueled that bubble is one of the many perks Germany’s chancellor gets in the new eurozone:
Merkel rewards Irish frugality with special terms
Author Andreas Noll / cd
Editor Sonya Diehn
Chancellor Merkel hailed the Irish prime minister and his country as a paragon of fiscal virtue in light of a private award. But Enda Kenny is apparently hoping for more than a statue from Germany and the EU.
Irish Prime Minister Enda Kenny’s November itinerary has the word “Berlin” penciled in twice. He was first invited to the German chancellery to talk politics on November 1, where he had a one-and-a-half hour luncheon with the chancellor. Next week, the German Magazine Publishers Association will award him the “Golden Victoria Prize for European of the Year.”
It’s a prize that Chancellor Angela Merkel believes the Irish minister deserves. In terms of employment rates, social welfare and the national budget, the reforms he has helped push through “absolutely justify the award.“
A model European
The Irish have two trying years behind them. Since November 2010, when Ireland requested and received financial assistance from the European Financial Stability Facility, it has enacted each of the reforms that the European Union, European Central Bank and International Monetary Fund required as conditions for the 85-billion-euro bailout ($109 billion).
The country is being hailed as a “model student” for having fulfilled every condition of the international lenders. As of this past summer, Ireland has once more been able to take on debt through public bond auctions, and by the end of next year the country should be on track for full reintegration into capital markets.
“We should never forget the sacrifices made by the citizens of countries that push through such reforms,” Merkel said. “That’s why I’d simply like to say thank you to Ireland for taking that path. It makes all of us stronger.”
Billions in debts
Still, Ireland has a sluggish economic growth rate of just .5 percent, along with an unemployment rate of 34 percent, and holds gigantic outstanding debts. Most of the latter are a result of the country’s decision to support banks affected by the financial crisis, to the tune of 64 billion euros. The country’s gross national debt now stands at 118 percent of the gross domestic product.
In order to lower debt levels, Prime Minister Kenny would prefer to recapitalize those same Irish banks through the European Stability Mechanism (ESM). But Angela Merkel is among the voices against that proposal. She believes the ESM should never be leveraged for banks with outstanding debts.
Yet Ireland’s call for help may still be heard. It all comes down to the words “special case.” Merkel has categorized Ireland as such, calling Irish public debts a “one-of-a-kind circumstance.”
Prime Minister Kenny allowed that message to be reiterated once more on his recent visit to Berlin. “I told her what we’re doing to further reduce banking sector debts and to rejoin capital markets as soon as possible,” he said. “The chancellor confirmed that Ireland is a special case, which is also why Ireland should be treated differently, as was clearly the case in June.”
“The more clarity we give on how Ireland can return once more to the bond market, the more successful that return can be when it’s carried out,” Kenny said.
The German chancellor countered by pointing to ongoing negotiations between finance ministers. “We’re interested in a sustainable completion of the reforms program,” Merkel said. But work completed by those ministers, she added, “will take some time.”
The message from the ECB, the EU, the IMF(sometimes), and Angela Merkel is clear: when a country like Greece or Ireland suddenly finds itself facing a massive debt crisis, what is required most is “clarity”. Clarity in economic policy will reinstill market confidence and bring about renewed investments and economic growth. Even if that “clarity” includes mandated austerity that is guaranteed to choke off economic growth and investment. At least, that’s the theory. Confidence Fairies aren’t the best theoreticians to begin with and now we have folks like the ECB, the EU, the IMF, and Angela Merkel leaving the Confidence Fairies even more deeply confused than normal. It’s New Normal Confusion: Austerity good. Deficits bad. Austerity raises deficits. Austerity bad? Confused Confidence Fairies can create a lack of clarity:
Wall Street Journal
Updated January 8, 2013, 1:16 p.m. ET
Ireland’s Double-Edged Bond Success
By RICHARD BARLEY
Ireland could hardly have chosen a better way to mark its assumption of the six-month rotating presidency of the European Union. Dublin garnered orders of more than €7 billion ($9.18 billion) for a €2.5 billion five-year bond sale, proof it is regaining access to markets just over two years after its bailout. But while Dublin’s success is a welcome vindication of the euro zone’s crisis response, it also poses a potentially tricky headache that could yet put Ireland and its partners at loggerheads.
The snag is that Ireland’s bond-market success partly reflects investors’ expectations that the euro zone will assume some of the burden of the country’s bank bailout, which cost 40% of GDP but which arguably averted a bigger European banking crisis; senior bondholders were made whole at the cost of Irish taxpayers. Failure to provide such aid could spark a selloff in bonds. But with Irish bond yields now back at precrisis levels, its euro-zone partners may try to dodge further transfers.
Ireland’s first priority is to renegotiate €28.5 billion of expensive debt used to recapitalize banks now being wound down; payments on that debt amount to nearly 1.5% of GDP a year at present. Ireland is hopeful a deal can be struck by March, when the next payment is due. Longer term, it believes the European Stability Mechanism could take over the government’s equity stakes in the banks, breaking the link between them and the sovereign—a deal first floated by euro-zone politicians in a summit declaration last June. The International Monetary Fund, in particular, is arguing strongly for this idea.
That leaves the euro zone with a dilemma: If it supports Ireland, it risks setting a precedent at a time when the jury is still out on whether Spain’s banking bailout is working. On the other hand, fail to support Ireland and investors may question whether the euro zone is once again backsliding on its commitment to bailout countries. That could push up yields not only for Ireland but for others, too. And while Irish debt currently looks sustainable, peaking this year at 122.5% of GDP, it might not take much to reignite fears about sustainability. Dublin still faces bank-sector contingent liabilities of 47.5% of GDP, RBS notes.
The eurozone’s debt renegotiations are one of the austerity-only-intra-currency-union catch-22s we’ve seen arise over the past few years: If you renegotiate the debt, you actually help the economy of the country in need — thus pleasing the Confidence Fairies. But you do so at the expense of admitting that the original austerity policies weren’t actually helpful and something new must be done — thus hurting the Confidence Fairies faith in the austerity myth. Confidence Fairies tend to be deeply religious (a whole theological spectrum), but their faith can be somewhat reactionary. Admitting poor past policy choices weakens their faith in the troika. Practicing their faith in the troika destroys reality. Embracing the faith of the Confidence Fairies can be a particularly confounding catch-22.
Hopefully being caught in a confounding situation provides some comfort for the rest of the eurozone’s austerity guinea pigs, because there’s some proposed “comfort funding” that the troika recently raised as a possibility for Ireland but it isn’t about comfort for people. It’s about weening Ireland off of the rest of that 85 billion bailout fund that Brian Lenihan “accepted” in 2010 (and will be paying out until 2053). That bailout money runs out next year and that’s why Ireland has to return to the normal debt markets soon. It’s financial “comfort funding” to help smooth over state financing for an austerity-stricken state. Part of the troika’s mandate appears to be the creation of deeply uncomfortable situations:
The Irish Times — Friday, January 25, 2013
Troika raises possibility of ‘comfort funding’
ARTHUR BEESLEY and DEREK SCALLY in Davos
The EU-IMF troika has raised the prospect of a new line of “comfort funding” for the Government to ensure there is no disruption to the public finances at the end of the bailout.
Under scrutiny in advance of the 10-day mission, which begins next Tuesday, is whether additional steps should be taken to ensure a smooth exit from the bailout in the autumn.
This question centres on the possibility of the troika providing a new line of credit to the Government as it attempts a full return to private debt markets.
Dublin would not necessarily draw down such credit but the fact that it was available might encourage private investment as there would be no risk of a funding shortfall if the Government did not sell enough debt.
An alternative, also being examined by the troika, is for the Government to proceed without the benefit of an additional safety net in order to demonstrate confidence in its debt to potential investors.
Note the two strategies the troika is considering for returning Ireland to the international bond markets: The troika could grant Ireland a credit-line to instill confidence in the bond markets. Or it could try the approach of no credit-line at all since that might make the market even more confident. Confidence Fairies make very important decisions in how our market-driven societies operate, but they also tend to be rather indecisive. Now you know how the troika has to deal with.
Sources close to talks between the troika and the Government said the international lenders are not at this point recommending any particular course of action. A new “technical paper” from the troika on exiting the bailout simply presents these alternatives as options for exploration, the sources said.
The discussions come as talks continue on bank debt relief and an extension of the maturity of bailout loans.
There is concern within the troika to avert any situation in which any Irish or European leaders are seen to be dictating to the European Central Bank to recast the Anglo Irish Bank promissory note scheme.
The troika fears this would undermine the ECB’s independence, threatening the prospect for a deal and raising the risk of a legal challenge.
Yes, the Confidence Fairies don’t simply want to see endless austerity and endless bailouts. They want to see endless austerity coupled to endless financial bailouts coupled to central bank independence including independence from national governments that might want to do something about the bailout-induced austerity. And if you reveal any secrets to the public, secrets like the document containing deliberations and threats between public officials negotiating major bailouts, the Confidence Fairies will freak out and implode the financial system. And, according to the troika’s concerns, the Confidence Fairies are also really really uncomfortable with attempts to renegotiate bailout deals after it becomes clear that the deals are destroying economies. The Confidence Fairies are also deeply opposed to anything that hints at undermining the ECB’s independence. But they’re open to “comfort funding” that will temporarily ease the pain of austerity. “Comfort funding” to ward off complete systemic implosion is fine, but only as long as Ireland is on the path towards no “comfort funding”. Just austere budgets. And lower debts and deficits. Eventually. But first bailouts and austerity. And secrecy. And faith in the system that is delivering bailouts, austerity, and secrecy.
Ireland’s Confidence Fairies, in case you hadn’t noticed, are kind of fascist. At least in theory.