As the second wave of near-bankruptcy washes over the shores of the eurozone, it is Ireland who walks the plank this time. Once the pride of Europe, the Emerald Isle now looks more like a state version of Lehman Brothers. By J BROOKS SPECTOR.
“Once upon a time and a very good time it was there was a moocow coming down along the road and this moocow that was coming down along the road met a nicens little boy named baby tuckoo….”
James Joyce, “Portrait of the Artist as a Young Man”
Well, the Irish have gone down that rocky road a way now, and it wasn’t such a very good time after all when that nicens little country met up with a financial steamroller instead of Joyce’s bountiful moocow. And the further result of their financial disaster has been a political one as well. Even after the current coalition government signed off on a $100 billion international bailout, Irish prime minister Brian Cowen confirmed he would dissolve the government after the country’s parliament passed the 2011 budget at the beginning of December. This followed an effort by protestors to storm the parliament building in Dublin – and after Moody’s Investors Service, the financial ratings agency, lowered their rating of Irish sovereign debt by several notches. Ouch!
Way back in the middle of this decade – and right now it seems like an aeon ago – Ireland was the go-go nation of Europe. Dubbed the Celtic Tiger, Ireland was the go-to country for investment funds, IT start-ups, foreign high-tech investors, and a housing building boom and price bubble that made virtually everyone else in the world jealous. But that’s all gone now, and maybe for a long time. Many of those new “McMansions” built in Ireland’s picturesque villages or in the shadows of those historic, scenic now-ruined castles are about to go up for distress sale prices – or worse. It’s Florida on the Irish Sea.
As the wolves circle, European, and most especially EU and the eurozone leaders are working hard to sort out the dirty details for a massive bailout package from the European Union and the International Monetary Fund to help salvage Ireland’s economy. Ireland’s crisis is probably more like the American sub-prime crisis than it is Greece’s recent pain, but Ireland’s agonies are rocking European and the euro’s stability nonetheless.
Supporters argue that this bailout should allow Ireland to shore up its wavering banks and crucially continue to operate without having to borrow money at budget-breaking rates. The decision received endorsements from the country’s neighbours, but international financial markets have been a bit more cautious. Investors will now get to watch the political repercussions and the inevitable angry public backlash as well.
Photo: Irish Taoiseach Brian Cowen(L) reacts as the Minister for Finance Brian Lenihan speaks to the media in Government Buildings Dublin November 21, 2010. Ireland requested an international bailout on Sunday to tackle its banking and budget crisis, the euro zone’s second bailout this year as Brussels moves to protect Europe’s wider financial stability. REUTERS/Cathal McNaughton
Ireland’s government does not see itself as having acted irresponsibly (as did Greece) in running up government deficits, almost without paying much attention to it, and the Irish have been preparing a four-year budget plan replete with sharp cutbacks to reduce its deficit down from 32% to 3% of GDP. But regardless, the government has been sinking further into debt, ever since it decided two years ago to protect its banks from all losses. In the intervening period, its banking system has now been weakened so much it finally decided there was nowhere else to go.
Banks, having stoked the real estate boom, now have losses of around €70 billion, or almost half the country’s economic output. As a result, as part of the bailout and budget process, new bank stress tests will be imposed and there will be a great shrinkage of local banks as the bailout will target, first of all, the recapitalisation and consolidation of its tottering banking structure. But beyond the impact on the banking sector itself, the shockwave will be a huge knock on Irish confidence. After years of Celtic Tiger growth, it is going to take a while for any resurgence.
For weeks, the Irish government denied it was going to need a rescue package, but following an emergency meeting on Sunday night, Brian Cowen, the country’s Taoiseach (prime minister), confirmed his nation had asked for help. The details are still being refined, but the total package is probably going to be about $100 billion – a huge whack for a country of about 4 million people. This newest bailout will come from the $1 trillion rescue mechanism the European Union and the International Monetary Fund established in May to help eurozone countries that start to drill down towards national defaults.
International officials hope this commitment will calm any investor stampede and, simultaneously, keep the contagion from spreading to the rest of the PIIGS – Portugal, Italy, Ireland, Greece, Spain. In fact, this fear of spreading market panic was a key element in pushing international economic officials to urge Ireland to take the money before things really fell apart.
Cowen said there would be two funds, one to back up the banks and another to allow Ireland to continue government operations without being forced to turn to the commercial bond markets, something Dublin has already said it cannot afford. The proponents of the package say it will allow the country to carry on without funds from the bond markets for up to three years.
Ireland is now up to its eyeballs in debt because the government has had to bail out the country’s main banks, an effort that has cost it $60 billion and driven the country’s 2010 deficit to 32% of GDP. Even as the bailout takes shape, international ratings agencies are mulling over downgrades – or actually issuing them – for Ireland.
Watch: Irish PM talks about crisis. (ITN)
And while government officials across Europe are hailing the bailout as a way to restore stability to the Irish government and the country’s financial sector and economy, not everyone agrees with this plan. Sam Bowman of the adamantly free-market Adam Smith Institute insists the rescue package is wrongheaded. As Bowman says: “The problem is that the Irish banks borrowed recklessly and funded a property bubble that has now burst. And what we are doing in this bailout is paying off people who lent to the Irish banks to try to prevent them from making losses. And what is going to happen is that the Irish taxpayer is going to have to pay back those debts. So really what we’re doing is transferring the debt from the people who lent to the banks to the Irish taxpayer, and that’s really not fair and really very bad for the Irish economy.”
Despite persistent rumours, the government insists it will not raise the country’s low corporate income tax – a rate that has been a key driver of the country’s growth trajectory. But the EU and the IMF are already starting to encourage Ireland to raise taxes to boost revenue so it can pay back the bailout funds.
Meanwhile, the crisis is also pushing the country towards a political crunch. The Green Party (part of the current government coalition) and opposition parties are pushing for a new government and snap elections, although the Cowen insists the national legislature should pass the budget vote on 7 December so the government could call a new election early in 2011.
But the Green Party has already announced it would pull out of the government as soon as the government budgets were in place, calling for elections immediately after that. In a statement, the Greens said, “We have now reached a point where the Irish people need political certainty to take them beyond the coming two months. So, we believe it is time to fix a date for a general election in the second half of January.”
New York Times columnist Ross Douthat has already written an elegy for the lost paradise of Ireland – and for the ideal of European integration. Douthat argues that, freed from the iron grip of the church, infused with entrepreneurial spirit, fuelled by an influx of international cash, “Ireland caught up fast: The kind of social and economic change that took 50 years or more in many places was compressed into a single revolutionary burst…. If the bailout does its work and the Irish situation stabilizes, the world’s attention will move on to the next EU country on the brink, whether it’s Portugal, Spain or Greece (again). But when the story of the Great Recession is remembered, Ireland will offer the most potent cautionary tale. Nowhere did the imaginations of utopians run so rampant, and nowhere did they receive a more stinging rebuke.
“But it’s the utopians of European integration who should learn the hardest lessons from the Irish story. The continent-wide ripples from Ireland’s banking crisis have vindicated the Eurosceptics who argued that the EU was expanded too hastily, and that a single currency couldn’t accommodate such a wide diversity of nations. And the Irish government’s hat-in-hand pilgrimages to Brussels have vindicated every nationalist who feared that economic union would eventually mean political subjugation.”
The bottom line – there is never, ever a free lunch – and the piper always gets paid at the end of the dance. But the underlying problem is that it isn’t clear where the next crisis spreading panic and fear is going to come from, spooking what New York Times columnist Tom Friedman has famously termed the international electronic herd. DM
For more, read the VOA, The New York Times, The New York Times, The Guardian, BBC, BBC, Time, Time blog, The Washington Post, The Irish Times, the Peterson Institute for International Economics and the Peterson Institute for International Economics.
Photo: Sinn Fein demonstrators clash with police officers after breaking through the gates of Government Buildings, in Dublin November 22, 2010. Two independent members of parliament said on Monday they may withhold support from Ireland’s 2011 budget, effectively depriving the government of a working majority. REUTERS/Cathal McNaughton