The Irish Times - Mon, Nov 08, 2010

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.

Others do not see the European influence as being quite so benign...

Letting these Eurocrats push us around is just not on - The Irish Times - Thu, Nov 11, 2010

However, Morgan "Morale Buster" Kelly confirms that actual Germans have occupied the Department of Finance and, unexpectedly, I had a moment of compassion for our civil servants who must endure the indignity.

Just because these Eurocrats are providing the cash to keep our banks afloat, I wouldn't be on for letting them push us around. I know we made our own mistakes, but let's face it, the Germans haven't really helped. In fact, keeping them happy has made our situation considerably worse

Sarah Carey's argument in the above piece is that the Government was forced to act as it did because the ECB was terrified of a Lehman style bank collapse, wants to keep the Euro strong, and was adamant that the Irish bank Bond-holders - chiefly German and French banks - had to be repaid in full.  However all of these things are not necessarily in the interests of the Irish people.

The Irish economy needs a weak Euro to help recover competitiveness, and Anglo-Irish bank was never a systemically important bank as far as the Irish economy was concerned. In fact it's influence was almost wholly negative: it created an asset price bubble, pushed up private sector borrowing to an unsustainable level, and resulted in a wholly disproportionate dependence on the building industry to keep the appearance of the Celtic Tiger going whilst the inflation it was creating was making the real economy in Ireland steadily less competitive.

Far from being the saviours of the Irish economy, Sarah Carey argues that the EU has been acting in the interests of its larger members...

Letting these Eurocrats push us around is just not on - The Irish Times - Thu, Nov 11, 2010

They are providing us with cashflow: just enough to pay back their bondholding credit unions and banks, but not enough to get lending going again to help our domestic economy. This talk of "good Europeans standing by their weaker friends" coats a considerable degree of self-interest.

Remember, in Greece, the government had to cut all kinds of public spending - but not the €1 billion for two submarines contracted to a German manufacturer. Meanwhile, Frau Merkel's comments that sovereign bondholders might have to take a hit were a significant factor in those 8 per cent yields that scared the bejaysus out of everyone.

Not everyone is quite so downbeat.  

Rumours of the nation's demise greatly exaggerated - The Irish Times - Thu, Nov 11, 2010

As the Irish Business Employers Confederation (Ibec) told EU commissioner for economic affairs Olli Rehn this week, we firmly believe business will deliver those numbers and that our growth potential far surpasses that of other peripheral EU states.

Our industry base remains strong, deep and dynamic, with a good spread between high-end manufacturing activity, services and increasingly research and development-driven activity.

Major global brands in key sectors, such as food and drink, medical devices, information and communications technology, pharmaceutical and financial services, have based themselves here because it remains a strategic export platform, servicing global markets.

Foreign direct investment (FDI) continues to make a very important contribution to our economy and the continued strength of the FDI pipeline demonstrates the extent to which investors remain confident. However, the scale of indigenous industry is less well recognised.

The problem is that the more productive sectors of the Irish economy are being swamped by the sea of debt being created by the Government's socialising the losses of the private banking sector.

The EU Economic and Monetary Affairs Commissioner Oli Rehn has been meeting with Government and Opposition parties, the trade union and the employer organisations over the past few days.  His presence may be symbolic of the fact that the EU now runs Ireland.  He has spoken in the past of Ireland having to give up its low corporate tax regime - a thorn in the side of bigger EU members, but perhaps the one remaining factor which allows Ireland to attract inward investment at the present time.  

Certainly the Opposition parties and the trade union movement are under enormous pressure to agree to the Government's 15 Billion four year public expenditure cuts programme - 6 Billion of which is to be achieved in the next year.  Why they should agree to take ownership of the Government's mistakes and compromise their own chance of winning the next election is less than clear.  They will probably end up doing more or less the same thing once elected, but bailing out the current Government would be an endorsement of some of the most disastrous Government decisions ever made.

The Government has lost its moral authority to govern, even as it further reduces the options available to any successor Government. The old, sick and poor will pay for the mendacity of a few members of the Irish financial elite, the neglect of the regulators, and the naïveté of the politicians. Having had their exposure to losses in Irish banks covered off for them, there is no reason why the European elite should care less.  

Ireland is too small to effect the overall balance of the Eurozone.  Indeed, Morgan Kelly opines that the real EU agenda is to use Ireland and Greece as salutary lessons for the countries they are really worried about - Italy and Spain.  Germany does not want to be left holding those rather big babies, and if Ireland goes down the tubes because of the totally unsustainable interest rates now being forced on it by Sovereign debt markets, then hopefully that will stop other countries from going down the same road.

There is only one problem with this scenario. If the Lehman default was indeed as toxic to the global financial system as has been argued, a Sovereign default by Ireland would be much more toxic to the EU, and particularly Eurozone.  Whether they like it or not, the major Eurozone players will have to intervene to prevent Irish sovereign debt interest rates going above a sustainable level (defined as long term growth plus inflation trends).  In practice this ceiling is somewhere less than 5% - much less than the current 8%.  The only way this can be done is for the ECB to develop some real capabilities, and for the German polity to accept that this must be done.  We live in interesting times...