Euro deal a mere re-brand

It failed to write down Ireland’s key private-debt overhang and so pawns our future to duopoly banksConstantin Gurdgiev 


Last month’s desperate deal reached by the euro-area leaders in a bid to rescue the common currency could have borrowed its cover from the famous guide. The Irish Government, coming out of the June eurozone summit, was full of conviction that Ireland will be delivered salvation from the onerous debts imposed onto the taxpayers under the successive government programmes for bank recapitalisations. The “seismic deal” allegedly “secured by the Taoiseach”, “gives Ireland the credibility to get back to the markets” and sets the government on track to “aim high in negotiations with euro-zone authorities”. That this bravado had a contagious effect on the Irish official Left – the Labour Party – simply adds some icing to an already grotesquely sugar-coated rhetorical cake.

Let’s start from the top. Éamon Gilmore used to claim he stood for the ‘working people’ of Ireland. So, the Labour Party are allegedly striving to put forward solutions to the crisis that protect the interests of ordinary taxpayers and consumers. And yet  the Labour Party leader has wasted no time in throwing his support behind the ‘debt deal’ which will simply re-brand some of our Sovereign Debt into consumer and mortgage-holders’ debt. Instead of writing down some €30 billion worth of the outstanding banking-sector-related debts and putting the insolvent banking institutions through a receivership, Mr Gilmore will replace the old debt with a new one.

The ‘deal’, assuming it does apply retroactively to Ireland’s case (an assumption of a tall order as will be explained below), will require the Irish state to guarantee banking debts to the European Stability Mechanism (ESM) which will act as a funding authority to the bust banks here. Instead of holding equity in Irish banks against capital put into them, the Irish taxpayers will end up issuing guarantees to cover the ESM holdings of Irish bank equity. Irish taxpayers will then, as consumers of banking services and mortgage-holders, be required to repay the ESM. This, in turn, means mortgages rates must rise, charges for bank-account  holders must go up and enforcement of distressed mortgages will have to become more stringent. Families will be going to the wall paying the ESM back on bank debts, while Kenny and Gilmore will be washing their hands of  any responsibility: “We’ve restructured banks debts, you see. Not our headache anymore. All complaints to the ESM, please.”

The problem with the entire deal is that neither the euro-area leaders, nor our own cabal of entrenched “State first, Citizens last” ideologues, seem to understand that the crisis we are living through is a crisis of excessive debt. The ‘seismic deal’ signed by the euro-area leaders changes nothing except the names of the  legal holders of our bad debts. The payers of it remain the same, namely us.

Add to that the fact that according to the latest German government statements and the euro-area white paper on banking union prepared by Herman von Rompuy, the common supervisory infrastructure and the deposits-guarantee scheme will be financed out of the mandatory euro-area  financial transactions tax (FTT) and we have an even bigger problem. Even basic economics would tell you that when market power is concentrated in the hands of a monopoly or duopoly, any tax or charge will be immediately passed in full to the end buyer of services supplied by the monopolist. Now, recall that under Irish government plans, our banking system is moving toward a ‘Twin Pillar’ system – in other words to a Bank of Ireland plus AIB duopoly. In such an environment, the EU-set  FTT will simply be a levy on the ‘ordinary workers’ availing of basic banking services here. So, go ahead Mr Gilmore, do the ‘right’ thing by your socialist textbook – punish the bad banks with a good ‘Robin Hood’ tax and see our private households’ debts become even less sustainable.

And the crisis will not be solved via ESM either, courtesy of the latest ‘deal’. The ESM’s set capacity is €500 billion. Setting aside the fact that it has yet to raise any of the funds it will be lending out, we already have EFSF-related demands for ESM funds (which will replace the EFSF in 2014) of €240-250 billion. But wait: retrospectivity   imports retrospectivity for all. If so, recall that Germany, France, Belgium, the Netherlands and Austria have also used taxpayers’ funds to recapitalise some of their banks. Thus before any of the new (post-2013) lending can be extended by the ESM, before any of the bonds buy-outs from the markets, and before any new capital injections into insolvent euro-area banks can start, the ‘seismic’ deal signed in June would have the ESM coffers fully exhausted.

The trials of the ESM, however, are semantic, compared to the heroic efforts of the Irish government to win a PR battle for the hearts and minds of the ‘ordinary workers’. The ‘deal’ in their view, allows for ‘relieving the burden of the banks debt’ and promises to ‘restart our economy back to growth’.

If the former proposition, as argued above, is questionable, the latter is outright bogus.

Since about 1999 – the year Ireland entered the fast-paced world of Ponzi finance with the first ( bubble, our growth was dependent on borrowing ever-increasing amounts of money from an ever-wider (geographically) set of lenders and blowing it on:

Investments in improved public services (e.g HSE, Fas, failed ICT systems debacles);

Benchmarking awards to raise productivity in the public sector;

PPPs that enriched politically-connected private sector players via contracts for ‘infrastructure development’ and subsidies to various schemes;

Private investments in land and development, as well as households’ investments in housing and property;


Excessive private consumption; and

Over-optimistic investments and acquisitions by the Celtic Tiger Irish companies.

Now, we are being told by our leaders – from both the centre and the left of our political spectrum – Ireland needs even more debt to kick-start the very same debt spiral with more public investments to ‘generate jobs’, ‘launch new era of growth’ and thus, enable us to pay down ‘old debts’.

In fact, we are currently borrowing money to pay interest on previous borrowings, both in the private (household and corporate, as well as banking) and public sectors.

We are also borrowing to fund excessive levels of current private and public consumption. At certain point in the future, when interest rates do indeed rise, either due to ECB policy rate changes or increased pressure on profi- margins (e.g. with the passage of FTT and assumption by the ESM of banks debts), or both, debt increases will spin out of control. There are other long-term drivers of interest rates that will contribute to higher costs of credit in the future, including higher-risk premiums to be demanded by foreign investors in the euro area and the adverse demography of the region.

Stimulating Irish government investment in the current conditions, coupled with the expectation of future increases in the cost of funding, is the equivalent of starving future investment and consumption – both private and public. Stimulating it via debt accumulation and transfers to the ESM is much worse.

With the already-planned fiscal adjustments, the working people of Ireland are on the hook for €8.6 billion more of cuts and taxes up to 2015. And we are also facing around €1.8 billion more of yet-to-be-announced tax increases to compensate for the expected decline in revenues from the banks and reductions in EU funding, once euro area ‘reforms’ and banking union materialise.

In other words, future income increases – on which stimulus financing and ESM repayments depend – are leveraged – borrowed. Only our leaders, plus a bunch of union heads, seem to be unaware of this reality.

This is debt-fuelled government investment binge is no answer to the austerity-driven suffocation of the economy. Only an outright writedown of household debts and a cooperative reduction in the overall public debts will do the trick – both of which are being pushed off the agenda by the ESM and the banking union deal agreed by Kenny, and Gilmore & Co.



Dr Constantin Gurdgiev is head of research at St Columbanus AG and an adjunct lecturer in Finance at Trinity College, Dublin. He holds a PhD in Macroeconomics and Finance from Trinity College, Dublin, an MA in Economics from Johns Hopkins University and an MA in Pure Mathematics from the University of California.