Tuesday, 23 November 2010

Perspectives on the Irish Bailout

Daniel Hannan writes:
Britain’s share of the Irish bail-out is reported to be £7 billion. Let’s just remind ourselves of what £7 billion means.

Seven billion pounds happens to be the total saving that would be made by all the welfare cuts put together. You know: the cuts that the BBC, the Guardian and the Labour Party insist will destroy social security. The cuts that Tristram Hunt says will mean a return to the Victorian workhouse. The cuts that John Cruddas says will drive a million people from their homes. The cuts that Polly Toynbee calls a final solution to the poor.

So now we know: every penny saved by these cuts will go to prop up the euro. To put it another way, at a time when Britain’s public sector debt stands at £850 billion, we are borrowing a further £7 billion to send to Ireland.
It’s true that some British banks are exposed in Ireland, but the interests of an international bank which happens to have its head office in London are not synonymous with those of the United Kingdom. And even if they were, it must surely by now be obvious that bailing out banks is a mistake.
Liam Halligan's earlier piece in The Telegraph is also well worth reading:
In September ... the Irish finance minister, Brian Lenihan, sought to tackle the situation head on, forcing Ireland's banks to come clean about the extent of their sub-prime losses to a greater extent than in any other European economy. As a result, some €50bn of Irish taxpayers' money was committed to stabilising the banking system over a number of years, allowing for a programme of genuine and necessary bank restructuring.

This was a staggering number – equivalent to around a quarter of annual national income. But at least the losses were no longer being denied – as in many other eurozone countries, to say nothing of the UK and US. Jean-Claude Trichet, European Central Bank President, called Ireland a "role model" urging other countries to "face up to their problems, as the Irish so clearly have done".

Recognising the bulk of the bank debt, making a genuine assessment of the potential stabilisation costs, then bringing those costs on to the state's balance sheet caused Ireland's projected budget deficit to balloon to an unprecedented 32pc of GDP. This figure has been widely remarked upon. Less well-known is that if several other and much larger European economies included their bank bail-out costs in their national accounts, rather than burying them off-balance-sheet, their projected deficits would be similar.
The European bigwigs are forcing a bail-out on Ireland not because the Irish state is bankrupt but because, as Ireland faces up to the extent of its banking sector losses, other nations aren't yet willing to do the same. The Irish are discovering, once again, how it feels when a spirited and determined people are denied their own sovereignty.
Of course, the Irish would have been much better off if their government had stayed out of the banking business altogether. The hit should have been taken by the bank's creditors, not the Irish taxpayers, as Morgan Kelly noted in the Irish Times:
September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.

Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.
I'll give the last word to Philip Booth:
Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government’s debt is owned by other banks and if the government defaults, they go bust; the EU as a whole then tries to rescue both in opaque arrangements which are only sustainable because Ireland is so small; now Britain is getting involved.

Responding to debt crises in this way is entirely unsustainable, we potentially have crises in Italy and Spain around the corner and nobody can shoulder their indebtedness.

The EU has been sitting around doing very little for the last two years (except for dreaming up new regulations for the banks, hedge funds and private equity). What it and the nation states involved should have been doing is ensuring that banks can be wound up in an orderly fashion so that all providers of capital and credit potentially lose money except for depositors who were insured at the beginning of the crisis. The EU governments are simply underwriting mistakes made by private businesses and then blaming it all on “casino capitalists”.

The Irish government’s debt position would not, in fact, be that bad if it were not for the bank guarantees. Ireland is not another Greece (or Italy) – its underlying position is sound. The key issue has not changed since the beginning of the crisis – it is the need to recognise failed financial institutions for what they are and not load the cost of their bad loans onto taxpayers in general. At the beginning of the crisis, the bail-outs were understandable; we have now had two years to sort out proper legal mechanisms for winding up banks.

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