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Ireland's political and cultural magazine
10 — village July - August 2012
L
AST month’s desperate deal reached by
the euro-area leaders in a bid to rescue
the common currency could have bor-
rowed 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 oner-
ous debts imposed onto the taxpayers under the
successive government programmes
for bank recapitalisations. The “seis-
mic deal” allegedly “secured by the
Taoiseach”, “gives Ireland the cred-
ibility 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 striv-
ing 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 retroac-
tively 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 con-
sumers of banking services and mortgage-holders,
be required to repay the ESM. This,
in turn, means mortgages rates must
rise, charges for bank-account hold-
ers 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 restruc-
tured 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 work-
ers’ availing of basic banking services here. So,
Euro deal a mere
re-brand
It failed to write down Ireland’s key
private-debt overhang and so pawns
our future to duopoly banks
®ÄãÙ½ÊÖÙÊÄÝãÄã®Ä¦çÙ¦®ò
Irish taxpayers
will, as
consumers
of banking
services and
mortgage-
holders, be
required to
repay the ESM
¨
11
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 house-
holds’ debts become even less sustainable.
And the crisis will not be solved via ESM either,
courtesy of the latest ‘deal’. The ESM’s se t cap ac-
ity 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 recapi-
talise 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 govern-
ment 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.
12 — village July - August 2012
Since about 1999 – the year Ireland entered
the fast-paced world of Ponzi finance with the first
(dot.com) bubble, our growth was dependent on
borrowing ever-increasing amounts of money
from an ever-wider (geographically) set of lend-
ers and blowing it on:
O Investments in improved public services (e.g
HSE, Fas, failed ICT systems debacles);
O Benchmarking awards to raise pro-
ductivity in the public sector;
O
PPPs that enriched politically-con-
nected private sector players via
contracts for ‘infrastructure devel-
opment’ and subsidies to various
schemes;
O Private investments in land and
development, as well as house-
holds’ investments in housing and
property;
O E xcessive private consumption;
and
O 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 invest-
ments 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 bank-
ing) and public sectors.
We are also borrowing to fund excessive lev-
els 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 pas-
sage 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 demog-
raphy of the region.
Stimulating Irish government
investment in the current condi-
tions, 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 compen-
sate 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 suffoca-
tion 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.
®ÄãÙ½ÊÖÙÊÄÝãÄã®Ä¦çÙ¦®ò
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
.
¨
The future for ordinary people, with Labour
