Saturday, June 02, 2012

Irish Prime Minister to Angela Merkel: we delivered on the fiscal suicide pact, now you give more money to our One Percenters

Irish voters on Thursday delivered German Prime Minister Angela Merkel a small but significant political victory on Thursday, when they voted in a nationwide referendum to approve her fiscal suicide pact that is the core of her dispute with the recently-elected French President François Hollande.

I've described in previous posts, including here and here, various problems with this awful treaty.

In this story, we see a great example of the ideological and practical corruption that two decades of full-on neoliberal economic ideology have produced: Stephen Collins and Arthur Beesley, Kenny seeks bank debt deal from Merkel after Yes vote Irish Times 06/02/2012.

Enda Kenny, Irish Prime Minister, conservative party leader and loyal Angiebot

Irish Taoiseach (Prime Minster; pronounced tee-shok) Enda Kenny heads the conservative Fianna Fáil (pronounced "Feena Foil"),(Fine Gael) Party, which is currently the senior partner in a coalition government with the Labour Party, headed by Tánaiste (Deputy Prime Minister) Eamon Gilmore. The Kenny-Gilmore government has been all in with Angie's brutal austerity economics, and both the government parties pushed hard for a "Yes" vote on the fiscal suicide pact.

Eamon Gilmore, Irish Deputy Prime Minister, Labour Party leader and loyal Angiebot

Ireland has played a weird role in our public conversation about budgets and finance the last few years. Prior to the crash, the Irish government had been pursuing neoliberal policies of deregulation, holding down public deficits, etc. Conservatives in the US held it up as a shining success story. Once they got hammered with the sovereign debt crisis, the doubled down on austerity in accord with the demands of the Angie-fied EU. During 2001, they had a brief period of improvement, which led conservatives once against to declare them a success story, this time of the alleged success of austerity policies during a depression. That was more false optimism, but the improvement was very transient.

Why did Ireland the model neoliberal country become a target of the bond vigilantes? Because when the 2007 crisis hit, they did what neoliberal One Percenter doctrine recommends, which is to bail out the banks along with their stockholders and bondholders. Paul Krugman has compared the separate approaches of Ireland and Iceland. Iceland also had a bank crisis. But Iceland allowed the failed banks to go under, i.e., they let the businesses as such fail, which wiped out the value of stockholders and bondholders, and the government put the banks into receivership, reorganized them after writing off the bad debts, and put them back into business.

This is a summary of what Iceland did, using terminology that is not very exact and generalizations to which there may have been exceptions, e.g., I don't know to what extent some bondholders may have been compensated. Paul Krugman summarizes it this way: "Iceland refused to take responsibility for the debts run up by runaway bankers." (Why Not The Worst? 10/21/2011)

Ireland, on the other hand, agreed "to guarantee all the debts of the country’s biggest banks". (Michael Lewis, When Irish Eyes Are Crying Vanity Fair Mar 2011) This makes the public and the taxpayers responsible for the losses, thus relieving the banks of the downside of the risks they assumed on the loans that went south. Krugman describes the results in Lands of Ice and Ire 11/24/2010:

Oh, and while the IMF is demanding that Ireland cut minimum wages and reduce unemployment benefits, its mission to Iceland praised the "focus on preserving Iceland’s valued Nordic social welfare model."

What's going on here? In a nutshell, Ireland has been orthodox and responsible — guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring — notice that wonderful line from the IMF, above, about how "private sector bankruptcies have led to a marked decline in external debt". Bankrupting yourself to recovery! Seriously. [my emphasis]
Ireland did much better recovering from the crisis because they addressed the real problem, the weakness of their banks, and solved it directly rather than putting in stopgap measures to allow the financial system to limp along without addressing the core problem of the banks. Krugman gives some data on Ireland's path to recovery in The Icelandic Post-crisis Miracle 06/30/2010, concluding:

And a strange thing has happened: although Iceland is generally considered to have experienced the worst financial crisis in history, its punishment has actually been substantially less than that of other nations. ...

The moral of the story seems to be that if you're going to have a crisis, it's better to have a really, really bad one. Otherwise, you'll end up taking the advice of people who assure you that even more suffering will cure what ails you.
The latter, of course, being with Ireland wound up doing. In his book End This Depression Now! (2012), Krugman notes:

For the most part, countries adopting harsh austerity policies despite high unemployment have done so under duress. Greece, Ireland, Spain and other found themselves unable to roll over their debts and were forced to slash spending and raise taxes to satisfy Germany and other governments providing emergency loans.
See also Krugman's pieces Eating the Irish New York Times 10/25/2010 and Iceland-Ireland Again 02/26/2011.

Which brings us back to Taoiseach Enda Kenny's demand for a quo for Ireland quid delivered in Thursday's vote. Does he ask Angie for money to provide relief to the large number of unemployed Irish? To maintain or restore public services? No. He asks her for money for private Irish financial companies:

Taoiseach Enda Kenny has told German chancellor Angela Merkel he wants a deal on the Irish bank debt following the decision of the Irish people to vote Yes to the fiscal treaty. ...

Dr Merkel said the referendum result was good news for Ireland and for Europe and deserved respect because of the hardship that Ireland had endured. ...

"The referendum result strengthens the euro zone's joint course toward the creation of a new, lasting stability union," she said in a statement.

Tánaiste Eamon Gilmore said last night that the decisive Yes vote in the referendum had "significantly strengthened" the Government’s hand in the negotiations about the bank debt.

He said that talks had been going on for months through European institutions about getting a deal on the issue. Mr Gilmore also phoned a number of European political leaders yesterday as part of the drive to get a deal.

A diplomatic source in Brussels warned that the Government still had big obstacles to surmount to secure a deal to reduce the debt.
Neoliberalism in the raw. The One Percent get taxpayer bailouts. The public gets the shaft. And the major parties of the left and right agree on such a program. Even in a situation like Ireland's, where, as Michael Lewis puts it:

Even in an era when capitalists went out of their way to destroy capitalism, the irish bankers set some kind of record for destruction. Theo Phanos, a London hedge-fund manager with interests in Ireland, says that "Anglo Irish was probably the world’s worst bank."
Eamon Quinn reported for the Wall Street Journal in Irish Bank Debt Refinance Talks Continue 05/15/2012:

Ireland has for some time been seeking to refinance a remaining EUR28 billion in promissory notes it pumped into two failed banks--Anglo Irish Bank Corp. and Irish Nationwide Building Society--to keep them from collapse during the worst of its banking crisis. ...

Irish government ministers have in the past said they also want to refinance a further EUR30 billion of loss-making home-loan mortgages held by two other lenders -- Allied Irish Banks ALBK.DB 0.00% PLC and Permanent TSB -- probably by using the European Stability Mechanism, the permanent bailout fund for the euro zone.

It aims to lessen the debt burden the country has taken on in saving its banks. Ireland has pumped in EUR64 billion--about 40% of its annual economic output--to save lenders that faced closure amid a property market collapse since 2008.

It is one of the most costly bank rescues in the world. [my emphasis]
Yes, Ireland's public debt crisis is a direct result of Ireland's decision to protect private banks from the consequences of their own risk-taking.

And, no, it doesn't really sound like the "free market" solution, does it? That's because neoliberalism is about using the public's money and the public's government to benefit the narrow class interests of the wealthy and the giant corporations, not about libertarian free-market principles.

In that connection, it's worth noting that Iceland's solution, a state-structured bankruptcy and reorganization of the financial institutions while letting the owners and creditors of the failed institutions bear the consequences of their risk in owning and/or lending to those companies, is not the "libertarian" version of a "free market" solution. In the dystopian vision of people like Ron ("Papa Doc") and Rand ("Baby Doc") Paul, if the banks fail, they fail, and whatever happens should happen with no government action. Unless it's maybe to beat, jail and shoot rioters when economic activity screeches to a halt after a country's whole financial system collapses with no government action to reorganize or replace it.

It was the decision of the Cheney-Bush Administration to simply let Lehmann Brothers go belly-up in 2008 without adequate preparation for the larger effect it would have on the financial system that set off the panic in 2008 that brought on the worst of the world financial crisis. That handled that one in the way "libertarians" would prescribe.

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