The kindness of strangers

Ireland is in a bad place. That is what the Irish Times makes clear in an article entitled 'If you thought the bank bailout was bad, wait until the mortgage defaults hit home'. The article's writer , professor of Economics at University College Dublin, Morgan Kelly, spells out the island's economic realities. But it also, in a way, points out the wages of sin. The sin of joining the EUnion, betraying your people and handing your country to an alien power.

To ward off economic collapse the Irish banks have been bailed out to the tune of 70 billion euros. In order to finance the bail-out, the Irish government acquired massive loans from the EUnion Central Bank (ECB). In essence then, the situation is described by the writer as: 'During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.'
Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”.
Prof. Kelly describes how Ireland could have solved the banking crisis and be done, by terminating bank guarantees on the grounds that three of the guaranteed banks had withheld material information about their (in)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, at the rather modest price of an unpleasant showdown with the European Central Bank.

But this is not what happened. Instead the Irish government trusted that “Europe will bail us out, just like they bailed out the Greeks. And does anyone expect the Greeks to repay?”. And thus the Irish Government has driven Ireland over the brink of insolvency.

That, however, is not the end of it. As bond yields and interest rates soar, the massive mortgage debt the Irish people have contracted becomes more and more unserviceable. People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke.

But soon enough this may change, when the Irish realize that defaulting (strategic or otherwise) is less costly to them personally then keeping up financial obligations. Given the complete lack of integrity displayed by the banking sector before, during and after the financial crisis of 2008, Irish home-owners facing a choice between obligations to the banks and to their families – mortgage or food – will start choosing the latter.

Irish banks pass under direct ECB control next year, which means that the principle priority will not be the health or recuperation of the Irish economy, but rather that the new, overriding priority will be to get the ECB’s money back by whatever means necessary. The ensuing drop in the amount banks are willing or able to lend will cause property prices to sink and interest-rates to soar even further, increasing the number of foreclosures and mortgage defaults.

It didn't have to be that way, had it not been for one of the biggest contributing factors to the Irish woes: The EUnion. The real, staggering injustice in all of this is the difference in treatment meeted out by the EUnion to the Greeks on the one hand and the Irish on the other. This was pointed out already back in August by Ambrose Evans-Pritchard who wrote:
Ireland must now pay more than Greece to borrow.

Dublin has played by the book. It has taken pre-emptive steps to please the markets and the EU. It has done an IMF job without the IMF. Indeed, is has gone further than the IMF would have dared to go. It has imposed draconian austerity measures. The solidarity of the country has been remarkable. There have no riots, and no terrorist threats.

Yet as of today it is paying 5.48pc to borrow for ten years, or near 8pc in real terms once deflation is factored in. This is crippling and puts the country on an unsustainable debt trajectory if it lasts for long.

Yet Greece is able to borrow from the EU at 5pc and from the IMF at a staggered rate far below that (still too high for the policy to work, but that is another matter). These were the terms of the €110bn joint bail-out.

To add insult to injury Ireland is having [to] SUBSIDIZE Greece to meet its share of the rescue fund.
And why? AEP puts it down to the Irish being more civilized and responsible than the Greeks are. His advice comes in the form of an observation: It evidently pays to riot in Europe. However, prof. Kelly sees a measure of deliberation in the EUnions cack-handed and unjust treatment of Ireland: 'We are too small to matter'. Slowly strangling the Irish relatively tiny economy will not send shock-waves through the EUnion.

And besides, the ECB’s real concerns lie with Spain and Italy. Making an example of Ireland is an easy way to show that bailouts are not a soft option, and so frighten them into keeping their deficits under control. And there is nothing the Irish can do. Politically they capitulated when they accepted the Turnip. Financially, the Irish government capitulated when they chose becoming insolvent over a bank resolution, thus allowing in the ECB vultures that are overseeing the execution of the Irish bankruptcy. There is no measure of sovereignty left with which the Irish could save themselves. Instead, "The Germans" impose upon them financial priorities that are not in the interest of Ireland or the Irish, but will ruin the country and impoverish the people.

And thus we reach the end of our tale: Ultimately, but too late, the Irish realize what the reward for a 'Yes' vote means in practice:
Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers.
(h/t EURef)

[UPDATE001] And if to hammer the point home:
The grief goes on as the yield on 10-year bonds rose above eight percent for the first time since the launch of the euro, 11 years ago. The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout efforts of five banks would cost at least €45 billion, equivalent to €10,000 for every man, woman and child in Ireland.

That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 percent of GDP, the highest in post-war Europe.


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